disclosing climate risks & opportunities in sec filings · 2018. 10. 29. · at the same time,...

DISCLOSING CLIMATERISKS & OPPORTUNITIESIN SEC FILINGSA GUIDE FOR CORPORATE EXECUTIVES,ATTORNEYS & DIRECTORS

FEATURING INVESTOR EXPECTATIONS FOR QUALITY DISCLOSURE

February 2011

Authored byJim CoburnSean H. DonahueSuriya Jayanti

Ceres is a national coalition of investors, environmental groups and other public interestorganizations working with companies to address sustainability challenges such as globalclimate change. Ceres directs the Investor Network on Climate Risk, a group of 95institutional investors with assets exceeding $9 trillion, by identifying the financialopportunities and risks in climate change and by tackling the policy and governanceissues that impede investor progress toward more sustainable capital markets.

ACKNOWLEDGEMENTSThis report was made possible through grants from the Libra Foundation, KresgeFoundation and Oak Foundation. The opinions expressed in this report are those of theauthors and do not necessarily reflect the views of the sponsors.

The authors would like to thank Mindy Lubber, Amy Augustine, Barry Borak, Sue Burrows,Chris Davis, Peyton Fleming, Andrea Moffat, Sean Pears, Tracey Rembert, Veena Ramani,and Meg Wilcox of Ceres for their valuable insights and editing suggestions.

The authors also express their sincere appreciation to the following group of outsidereviewers who provided valuable feedback on a draft of this report:

Michelle Chan, Friends of the EarthJulie Desjardins, Desjardins & Associates Consulting Inc.Nick Edgerton, Colonial First State Global Asset ManagementGraham Erion, Climate Change Lawyers NetworkMichael Gerrard, Columbia Law SchoolJulie Fox Gorte, Pax World Management LLCLois Guthrie, Carbon Disclosure ProjectKit Kennedy, Natural Resources Defense CouncilGayle Koch, Axlor Consulting LLCSanford Lewis, Investor Environmental Health NetworkBill McGrew, California Public Employees’ Retirement SystemBrian Rice, California State Teachers’ Retirement SystemPeter Safirstein, Milberg LLPWilliam Thomas, Skadden, Arps, Slate, Meagher & Flom LLPAlan Willis, Alan Willis & AssociatesIan Woods, AMP Capital InvestorsPeter Zalzal, Environmental Defense Fund

All views expressed in this report represent the views of the authors.

This report does not provide legal advice on what any particular company should disclosein its SEC filings, but instead provides general recommendations on good disclosurepractices. Each company’s operations and business circumstances differ, and disclosuredecisions and materiality judgments are fact- and context-specific. Companies shouldseek advice from their legal counsel and other advisors on what they should and arerequired to disclose.

Patricia Robinson designed and produced the final report.

© 2011 Ceres. All rights reserved.

TABLE OF CONTENTSFOREWORD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

EXECUTIVE SUMMARY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

CLIMATE CHANGE DISCLOSURE AND THE NEW SEC GUIDANCE . . . . . . . . . . . . . 9Climate change science and policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10Risks and opportunities for businesses. . . . . . . . . . . . . . . . . . . . . . . . . . . . 11Determining materiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12Which companies should disclose climate risks and opportunities? . . . . . . 13Disclosure of material ESG issues in addition to climate change. . . . . . . . . 15

SEC DISCLOSURE EXPECTATIONS AND HOW COMPANIES ARE RESPONDING . . 17Methodology for selecting companies and rating disclosures . . . . . . . . . . . 17Regulatory risk & opportunity: Impact of domestic legislationand regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18Regulatory risk & opportunity: International accords. . . . . . . . . . . . . . . . . . 20Indirect consequences of regulation or business trends . . . . . . . . . . . . . . . 21Physical Impacts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

OTHER KEY ELEMENTS OF STRONG CORPORATE DISCLOSURE . . . . . . . . . . . . . 26Climate change litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27GHG emissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28Strategic analysis of climate risk and emissions management . . . . . . . . . . 31

CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

11-POINT CHECKLIST: DEVELOPING A CLIMATE CHANGE STRATEGY& DISCLOSING RISKS & OPPORTUNITIES IN SEC FILINGS . . . . . . . . . . . . . . 34

DISCLOSING CLIMATE RISKS & OPPORTUNITIES IN SEC FILINGS: A GUIDE FOR CORPORATE EXECUTIVES, ATTORNEYS & DIRECTORS

Table of Contents

FOREWORDAs this report is being published, the costs of Australia’s epic January floods are stillbeing assessed. Beyond the billions of dollars in infrastructure damage, shipping andagriculture suffered major losses, causing economic ripples globally. Disruption of cokingcoal exports, for example, caused global coal prices to rise 25 percent, with further priceincreases threatening to shock the Asian steel industries that depend on Australia’s coal.

Climate change threatens many more such extreme weather events—like this one-in-200-year flood—and more material impacts on companies’ operations and futurefinancial prospects. A new study by consulting firm Mercer, in fact, warns that climatechange could increase investment portfolio risk by 10 percent over the next 20 years.

At the same time, of course, governments worldwide are moving to limit the carbonemissions that cause climate change. India became the first nation last year to levya carbon tax on coal producers. Japan, Australia, the European Union and South Koreaare pursuing similar measures, as the United States inches closer to regulatinggreenhouse gases under the Clean Air Act.

For years, investors managing trillions of dollars have been pressing companies to disclosematerial information on just these sorts of risks, as well as on the opportunities relatedto climate change, such as escalating demand for clean technologies. In February 2010,the U.S. Securities and Exchange Commission responded, issuing guidance forcompanies on climate change-related information they should be disclosing to investors.

Despite the SEC guidance, this report’s review of companies’ most recent 10-K filingsshows that improvements in climate risk disclosure have been incremental at best.

And while voluntary reporting on climate risks is helpful, it is not sufficient. Investorsneed information that is standardized and regulated, and they need to be able to findthat information in one place.

This report, Disclosing Climate Risks & Opportunities in SEC Filings: A Guide for CorporateExecutives, Attorneys & Directors, aims to help companies review and improve theirdisclosure. It provides clear guidance for firms on how to assess and disclose climate risksand opportunities, as well as concrete examples of what investors view as quality disclosure.

At its heart, good disclosure is about specificity and quantification. It’s about providinginvestors the concrete information they need to be able to evaluate a company’s risksor to compare that company to its peers.

Chiquita Brands International, for example, describes in its most recent 10-K thephysical climate risks, such as drought, temperature extremes, floods and hurricanes,which could reduce its crop size and quality; and it quantifies those impacts, from thecosts of shipping disruptions, to the costs of rehabilitating flooded farms and procuringreplacement fruit.

Electric power company AES Corp. disclosed estimated costs of its compliance with theU.S. Northeast’s regional cap and trade program, as well as the model and methodologyused to derive those estimates, in its 10-K.


Foreword

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Quality disclosure should also include information on climate-related opportunities,such as Siemens’ disclosure in its 2009 20-F that it considers climate change to bea “global megatrend” that will impact all humanity, and that it has aligned its strategyand business activities to minimize carbon dioxide emissions.

To attain this level of disclosure, management must systematically analyze the company’spotential risks and opportunities related to climate change, and then use sound judgmentto decide which risks and opportunities are material and therefore require disclosure.Creating sustainable governance systems and setting up a climate management teamto oversee procedures for monitoring greenhouse gas emissions and analyzing risks willmake this challenge easier.

This report lays out the practical steps for such a comprehensive approach.

Finally, companies should bear in mind that climate risk is but one of many environmental,social and governance (“ESG”) risks that have financial impacts and that the SEC isbroadening its focus beyond climate disclosure to encompass mining safety, conflictminerals and other sustainability challenges. Putting strong systems in place foranalyzing and disclosing climate-related risks will help companies report on thesebroader sustainability risks.

Companies that improve their transparency and disclosure with investors on climate-related risks and opportunities will be better positioned to navigate and competein a global business environment increasingly affected by climate change and othersustainability risks. Ultimately, that should mean stronger shareholder value.

Mindy S. LubberPresident, CeresDirector, Investor Network on Climate Risk


Foreword

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EXECUTIVE SUMMARYAdjusting to a world profoundly shaped by climate change is one of the great challengesof the 21st Century. For companies, understanding and responding to the risks andopportunities from climate change, whether from carbon-reducing regulations or physicalimpacts, has become a business imperative. For investors, identifying firms that areahead of the curve—and those that are behind—in responding to this growing businesstrend is equally vital. That is why growing numbers of investors in recent years havedemanded that companies disclose material climate-related risks and opportunities andhave pressed the Securities and Exchange Commission and other regulators to ensurethat these disclosures satisfy securities law requirements and the needs of the public.

This Ceres report, Disclosing Climate Risks & Opportunities in SEC Filings: A Guide forCorporate Executives, Attorneys & Directors, discusses the significance of majordevelopments in climate disclosure and provides specific guidance to help companiesimprove their public filings. It focuses on three primary areas: (1) an overview of recentdevelopments in climate disclosure, particularly the SEC’s interpretive guidance onclimate risk disclosure issued in 2010; (2) investor expectations concerning keycategories of climate disclosure, including specific company examples from recentsecurities filings; and (3) an 11-point checklist to help companies improve the qualityof their disclosure and position themselves to respond more effectively.

Climate Risk Disclosure and SEC GuidanceThe SEC’s Commission Guidance Regarding Disclosure Relating to Climate Change,released in February 2010, outlines public companies’ obligations under securities lawsand SEC regulations to disclose to investors material information concerning climate-related risks and opportunities. The Guidance follows longstanding efforts by majorinvestors, state law enforcement officials and others to focus companies’ attention onthe quality of their climate-related disclosure, and its release coincides with importantnew regulatory developments, including EPA’s adoption of regulations for greenhouse gas(“GHG”) emissions from motor vehicles and large sources such as power plants andfactories under the Clean Air Act. The new Guidance serves as a reminder that climaterisk disclosure is not only a matter of responsiveness to investors’ demands but ofcompliance with basic legal obligations.


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The SEC Guidance recognizes that climate change has become an important featureof the physical, economic, regulatory and physical environments in which companiesoperate. Carbon-reducing regulations may impose direct compliance costs or increasethe cost of inputs. Changing weather patterns may affect a firm’s operating costs,threaten its water supplies, increase risks of catastrophic weather-related losses, or alterconsumer demand for its products or services. Public awareness of the climate changeissue can create reputational risks for firms with high greenhouse gas emissions.

At the same time, climate change can open significant new opportunities for businessesthat offer low-carbon products, can profit from emissions trading markets, or provideservices relating to adaptation to climate change. Climate change can portend both riskand opportunity for a single company: laws regulating emissions may present risks for anenergy firm that relies on fossil fuels, but also opportunities in its wind power division.

Assessments of corporate disclosure practices on climate change show significantimprovements in recent years, particularly in voluntary disclosures. However, overalldisclosure continues to be highly inconsistent and often inadequate, particularly inmandatory filings, and frequently fails to meet the needs of investors.

Release of the SEC Guidance presents an opportunity for companies to review andimprove their climate disclosure practices. Businesses should take advantage of thelarge and growing body of resources available to assist in meeting their disclosureobligations. In addition to the SEC Guidance, and authoritative general statements ofinvestor expectations such as the Global Framework for Climate Risk Disclosure, theseresources now include sector-specific guidance such as Global Climate DisclosureFrameworks produced by Ceres and investor groups for the oil and gas, automobile andelectric utility sectors, and the National Association of Insurance Commissioners’ InsurerClimate Risk Disclosure Survey. Firms should also be aware, as the SEC Guidance notes,that disclosures now being made voluntarily, such as in corporate sustainability reportsor Carbon Disclosure Project survey responses, may also need to be made as part ofmandatory SEC filings.

Finally, it should be noted that climate risk disclosure is not the only significantenvironmental, social or governance (“ESG”) issue that is inadequately disclosed;others of note include risks associated with water scarcity, mining safety and deepwaterdrilling. Climate change, however, is a topic investors have been particularly focused onin recent years, and for which there are now ample resources to help firms to producequality disclosure.

Climate Disclosure Best Practices in SEC FilingsA review of SEC filings for the 2009 fiscal year, the most recent year for which 10-Ks areavailable, reveals an array of climate change reporting examples reflecting differing levelsof comprehensiveness, detail and clarity, and too many companies that fail to addressthe issues at all. Our report includes examples of reporting that reflect good, fair andpoor disclosure. This report does not identify examples of exemplary disclosure becausesuch examples are wanting. The overall level of disclosure, while improving, remainswell below where it should be. For example, a recent report by ISS Corporate Servicesanalyzed disclosures by the 100 largest U.S. public companies, finding that just 51made any reference to climate change in their 2009 10-K filings, only 22 discussedclimate change opportunities, and only 24 addressed physical risks to their assets fromclimate change.


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Our report examines disclosure of the following key categories of climate risks andopportunities:

Regulatory Risk and Opportunity: Regulatory risk and opportunity refers to theconsequences of proposed or enacted domestic regulations on a company’s operationsand financial prospects, such as changes in costs or profits from the sale of emissionscredits, costs to comply with regulatory limits on emissions, or impacts from regulation-driven changes in demand for goods and service. Disclosure of regulatory risks andopportunities involves identifying the relevant proposed or enacted regulatory provisions,and explaining their financial impact on the company when the impact is significantenough to warrant disclosure. Adequate disclosure should include specific details andquantification of impacts of regulation when possible. Disclosure of the impact ofinternational accords addressing climate change follows the same principles.

Indirect Consequences or Business Trends: Legal, economic, or technologicaldevelopments associated with climate change may create new opportunities or risksby, for example, decreasing demand for goods or energy sources associated with highgreenhouse gas emissions or increasing demand for “cleaner” products or energysources, or by increasing competition to develop new products. The SEC Guidanceexplains that such business trends and risk factors must be disclosed where material.Good quality disclosure of business trends requires a thoughtful and candid discussionof management’s understanding of how climate change affects its business.

Physical Impacts: Significant physical effects of climate change, such as increasedincidence of severe weather, rising sea levels, reduced arability of farmland and reducedwater availability and quality, may materially affect a company’s operations, competitivenessand results. Quality disclosure of physical impacts provides detailed information aboutthe nature of climate change risks and opportunities, and quantifies them where possible.

Greenhouse Gas Emissions: Obtaining data on GHG emissions—including both currentemissions and trends over time—is usually necessary for a company’s own efforts toassess its climate change-related risks and opportunities, and for investors assessinga company’s financial condition and prospects. Investors worldwide have expresseda clear desire for standardized emissions reporting by companies. Investors want not onlya snapshot of current emissions, but a sense of the direction of the company’s carbonmanagement. Accordingly, high quality emissions disclosure will set forth themethodology used to analyze emissions; current direct and indirect emissions; actualhistorical direct and indirect emissions and estimated future direct and indirectemissions from their operations, purchased electricity and products/services.

Strategic Analysis of Climate Risk and Emissions Management: The GlobalFramework for Climate Risk Disclosure calls upon companies to provide analysis thatidentifies their future challenges and opportunities associated with climate change:specifically, management’s strategic analysis of climate risk, including a clear andstraightforward statement about implications for competitiveness. Where relevant, thecompany should address access to resources, the timeframe that applies to the risk andthe firm’s plan for meeting any strategic challenges posed by climate risk. The GlobalFramework urges companies to disclose a strategic analysis that includes: a statement ofthe company’s current position on climate change; an explanation of all significant actionsthe company is taking to minimize its climate risk and identify opportunities (emissionsmanagement); and corporate governance actions relating to climate change, such as theestablishment of any management or board committees to address climate risk.


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An 11-Point Checklist for Identifying, Disclosing andAddressing Climate Risks and Opportunities1. Integrate consideration of climate risk and opportunity throughout the firm.

Climate change should be part of a company's overall sustainability strategy, andconsideration of climate risk should be integrated throughout all relevant componentsof the firm. Personnel responsible for preparing sustainability strategy and voluntaryclimate disclosures should be in close communication with those responsible forassessing financial risk and preparing and approving mandatory securities disclosures.

2. Create a climate management team. Creating a team of senior managers helpsensure that systematic, high-level consideration of climate change issues isintegrated throughout a company’s operations.

3. Create a board oversight committee. Companies should designate a committeeof the board to assume specific responsibility for oversight of climate change, which,in addition to posing operational and managerial issues, implicates important mattersof corporate strategy, reputation and capital investment that are appropriate forboard consideration.

4. Develop internal controls and procedures for gathering of GHG emissionsdata and other climate change-related information. Reliable information onfirm emissions, physical risks, enacted and proposed regulations, and climate-relatedinitiatives is essential for management analysis, decision-making and disclosureto investors.

5. Measure, benchmark, and inventory current GHG emissions from operations,electricity use and products. Calculating emissions is an important first step inevaluating climate risk. A firm cannot, for example, determine the potential impactof regulations without knowing what its emissions are.

6. Calculate past and projected emissions. Analysis of past and projected futureGHG emissions is necessary for a company to understand its emissions trends andassess future regulatory or competitiveness risks.

7. Create specific emissions reduction targets and regularly report on progress.For firms that adopt goals of reducing GHG emissions, specific, verifiable targets anddeadlines provide invaluable means of focusing employees’ energies on achievinggreater energy efficiency and providing concrete information for investors.

8. Identify risks and opportunities; then assess materiality. The heart of effectivedisclosure is systematic analysis of potential risks and opportunities relating toclimate change, and management’s exercise of judgment on which risks andopportunities are material and therefore require disclosure. Although climate-relatedrisks can be classified in different ways, it is useful to consider them in terms ofseveral broad categories:

• Physical risks. Assess physical risks relating to climate change—i.e., how changesin climate affect the business and its operations, including its supply chain.

• Financing and underwriting risks and opportunities. Firms that insure, reinsure orindemnify properties or operations may be at a higher risk of harm due to climatechange and must assess how climate change is affecting their operations andprospects.

• Regulatory risks and opportunities. Identify regulatory measures that affect thefirm’s financial position and operations, as well as proposed measures reasonablylikely to be enacted, and analyze how they would affect the company’s financialcondition and results of operations, with attention to opportunities as well as risks.


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Executive SummaryDISCLOSING CLIMATE RISKS & OPPORTUNITIES IN SEC FILINGS: A GUIDE FOR CORPORATE EXECUTIVES, ATTORNEYS & DIRECTORS

• Litigation risks. Companies must disclose litigation relating to climate change thatis material or that satisfies thresholds set out in SEC regulations.

• Indirect risks and opportunities. Climate change can materially affect a company’sfinancial position indirectly, such as increasing the costs of energy or by changingpatterns of consumer demand.

• Reputational risks. Public perceptions about climate change and companies’responses can importantly affect companies’ reputations and consumer demandfor particular products.

• Emissions. As previously noted, all companies need to determine their GHGemissions in order to assess their climate risk. GHG emissions data is importantto investors because it provides a concrete measure of a company’s exposure andallows for valid comparisons among firms. Companies should err on the side ofdisclosing emissions data in their SEC filings.

9. Quantify emissions, risks and opportunities whenever possible. Specificnumbers, when reasonably attainable, are preferred over general statements.

10. Be specific: Provide a particularized discussion of climate risks andopportunities with respect to specific company assets and operations.Investors interested in how companies will fare in a transitioning to a carbon-constrainedworld want particularized disclosure of both risks and opportunities, with reference tospecific corporate operations, not generic “boilerplate” statements.

11. Consider investors’ demands when assessing materiality. The materialitystandard that determines what information public companies must disclose ultimatelyturns on the needs of the reasonable investor. In assessing materiality, firms shouldpay attention to what information investors are, in fact, seeking.

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Climate Change Disclosure and the New SEC GuidanceDISCLOSING CLIMATE RISKS & OPPORTUNITIES IN SEC FILINGS: A GUIDE FOR CORPORATE EXECUTIVES, ATTORNEYS & DIRECTORS

CLIMATE CHANGE DISCLOSUREAND THE NEW SEC GUIDANCEFor years, investors have been pressing corporations to disclose material informationabout the risks and opportunities posed by a range of environmental, social andgovernance (“ESG”) issues. Material or potentially material ESG issues—although toonumerous to list here—can be broken down into broad categories: environmental,human rights, labor practices, societal impact and product responsibility.1 In the last10 years, institutional investors have paid particularly close attention to risks andopportunities related to climate change, whether from physical impacts, new emissionsregulations, competitive market trends, litigation or reputational exposure.

In 2010, the Securities and Exchange Commission, responding to a 2007 petition fromtwenty institutional investors, state officials and other groups, issued formal “CommissionGuidance Regarding Disclosure Relating to Climate Change” (or “Guidance”).2 TheGuidance, effective February 8, 2010, discusses climate change and greenhouse gas(“GHG”) regulation in light of long-settled legal principles requiring disclosure ofinformation necessary for the investing public to make informed investment decisions,and emphasizes public companies’ responsibility under settled law to disclose materialrisks and opportunities relating to climate change.

The SEC Guidance is a watershed in longstanding efforts to improve the quality ofcorporate disclosure on climate change, and to encourage companies to discuss climatestrategies transparently with investors. The Guidance emphasizes that disclosure ofmaterial climate change issues is a matter of pre-existing legal obligation, as it has longbeen a requirement that companies disclose material risks to investors.3 Combined withimportant new developments in federal and state greenhouse gas regulation, theGuidance signals the need for companies to take a fresh look at their climate changestrategies and disclosure practices.

The SEC Guidance signalsthe need for companiesto take a fresh look at theirclimate change strategiesand disclosure practices.

1 For more information, see Global Reporting Initiative’s “Sustainability Reporting Guidelines Reference Sheet,” www.globalreporting.org/ReportingFramework/G3Guidelines/#NumberSix.2 75 Fed. Reg. 6290 (Feb. 8, 2010) (“SEC Guidance”), www.sec.gov/rules/interp/2010/33-9106fr.pdf.3 See id. at 6295 (discussing “a number of Commission rules and regulations that may be the source of a disclosure obligation for registrants under the federal securities laws”). As

business commentators have noted, “the release of the 29-page interpretive guidance does signal that SEC staff will pay more attention to climate-change-related data in futurereviews.” Sarah Johnson & Marie Leone, “Hot Topic: Climate Change Disclosure,” CFO.com (Feb. 19, 2010), www.cfo.com/article.cfm/14475707.

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The Guidance—while important—is not the last word on climate change disclosure infinancial filings. If history is any guide, the SEC will refine its interpretive guidance overa period of years to better define what it expects of registrants. In addition, in this quicklyevolving field, investors, standard-setting organizations, accountants and corporationswill continue to play an important role in defining the future of climate disclosure.

For these reasons, this report does not focus solely on the SEC Guidance, but examinesinvestor statements on the reporting they require, particularly the Global Framework forClimate Risk Disclosure.4 Corporations will improve the quality of their assessments ofmaterial risks, and their SEC reporting, by examining investor statements and otherstandards for climate risk disclosure in addition to the SEC Guidance. Furthermore,ensuring that disclosure practices comply with securities laws and meet investors’ needscan better position companies to prosper in a business environment increasingly affectedby climate change and the regulatory and market responses to it.

Finally, companies will improve the quality of their reporting by ensuring that voluntaryand mandatory disclosures are not inconsistent. Of course, this does not mean thatvoluntary and mandatory disclosures will be identical in content or scope: voluntarydisclosures are often more extensive, as they include information that does not necessarilymeet SEC materiality standards. However, mandatory disclosures should be factually andconceptually consistent regarding the impact of climate-related risks and opportunities andthe company’s business strategy for addressing these issues. For example, if a company’svoluntary disclosures suggest significant impacts from climate change, or that it expectsto reap large financial benefits from steps taken in response to regulatory changes ormarket shifts, mandatory disclosures should not omit discussion of these issues.

Climate Change Science and PolicyRecent authoritative reviews of climate change science have confirmed that the burningof fossil fuels and other human activities that result in emissions of carbon dioxide,methane and other greenhouse gases are changing the Earth’s climate and raisingaverage global temperatures.5 According to the National Oceanic and AtmosphericAdministration, 2010 was the warmest year of the global surface temperature recordbeginning in 1880, and the 34th consecutive year with global temperatures above the20th century average. More than a dozen countries set all-time heat records in 2010.

Climate change has broad implications for society beyond temperature changes. Itsconsequences include more frequent and intense heat waves and droughts, morepowerful storms, limited water availability in some regions, new pressures on ecosystemsand habitats, a range of human health effects and rising sea levels and oceanacidification, among others.6

4 The Global Framework (2006) was created by a global partnership of 14 institutional investors and other organizations to provide specific guidance to companies regarding theinformation they provide to investors on the financial risks posed by climate change, www.ceres.org/Document.Doc?id=73.

5 See, e.g., EPA, Final Rule, Endangerment and Cause or Contribute Findings for Greenhouse Gases Under Section 202(a) of the Clean Air Act, 74 Fed. Reg. 66,495 (Dec. 15, 2009)(“EPA Endangerment Finding”); National Academy of Sciences, “Understanding and Responding to Climate Change: 2008 Edition” (2008),www.nationalacademies.org/morenews/20080519.html; Intergovernmental Panel on Climate Change (“IPCC”), “Fourth Assessment Report: Climate Change” (Cambridge UniversityPress, 2007), www.ipcc.ch/.

6 See, e.g., IPCC, “Climate Change 2007: Impacts, Adaptation and Vulnerability,” Contribution of Working Group II to the Fourth Assessment Report of the Intergovernmental Panel onClimate Change, Summary for Policymakers at 8-12, 18 (Cambridge University Press, 2007); EPA Endangerment Finding, 74 Fed. Reg. 66,524-26.

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Responding to the serious risks that climate change poses in the near- and long-term,and to public calls for remedial action, governments across the world are enactingpolicies to address emissions of the greenhouse gases that drive climate change.In the United States, major regulatory developments have included the establishment ofcap-and-trade systems and emissions reduction targets at the regional and state levels,7and the Environmental Protection Agency’s promulgation of regulations under the CleanAir Act limiting greenhouse gas emissions from cars and large stationary sources such asfossil fuel-burning power plants.8

Risks and Opportunities for BusinessesClimate change has become an issue of immediate importance for many businesses—one that can affect a company’s current operations and future financial prospects.Government regulation of GHG emissions may impose direct compliance costs orincrease the cost of inputs, or may create competitive advantages for firms thatmanufacture products with lower emissions than competitors’ products or that conserveenergy. Changing weather patterns may affect a firm’s operating costs, threaten its watersupplies, increase risks of catastrophic weather-related losses, or alter consumerdemand for its products or services. Public awareness of this issue can also createreputational risks for firms with high GHG emissions; even the appearance of insensitivityto environmental concerns in general may affect a company’s reputation and thereforeits market value.

While climate change carries risks for many companies, it also offers significant newopportunities for firms offering low-carbon energy or products, those that can profit fromemissions trading markets, and companies that provide services relating to adaptation toclimate change. And climate change may present both risks and opportunities to a singlefirm: the enactment of laws regulating emissions may create financial risks for an energyfirm that relies on fossil fuels, but may create important opportunities for that samecompany’s wind power division.

In short, climate change is now an important feature of the physical, economic andregulatory environments in which companies operate. Therefore, it has become a focusof interest of hundreds of shareowners worldwide, including many of the world’s largestpublic pension funds, asset management firms, private equity investors and others.9Investors want to understand which companies are most exposed to the risks associatedwith climate change, and which are best positioned to benefit from the opportunities. Toprotect their portfolios over the medium and long term, investors want to know whichfirms are addressing the multiple transformations climate change brings, and which arebehind in responding to physical changes and various climate-related regulations.Increasing numbers of investors have demanded that corporations disclose informationconcerning climate risks and opportunities, and explain how their firms plan to respondto new regulatory constraints on carbon emissions and physical climate impacts.

Investors want tounderstand whichcompanies are mostexposed to the risksassociated with climatechange, and which arebest positioned to benefitfrom the opportunities.

7 See, e.g., Pew Center for Global Climate Change, State Legislation from Around the Country, www.pewclimate.org/what_s_being_done/in_the_states/state_legislation.cfm.8 Responding to the Supreme Court’s decision holding that GHGs are pollutants under the Clean Air Act, Massachusetts v. EPA, 549 U.S. 497 (2007), and to its own conclusion that

GHGs endanger public health and the environment, EPA Endangerment Finding, 74 Fed. Reg. 66,4964-95, EPA has taken steps to regulate GHG emissions from motor vehicles,75 Fed. Reg. 25,324 (May 7, 2010), and large stationary sources, 75 Fed. Reg. 17,004 (Apr. 2, 2010); 75 Fed. Reg. 31,514 (June 3, 2010). Comprehensive federal legislationtargeting GHGs went further than ever before in the 111th Congress; the American Clean Energy and Security Act of 2009, H.R. 2454, passed the House of Representatives on June26, 2010, and companion legislation was reported out of the Senate Environment and Public Works Committee, Clean Energy Jobs and American Power Act, S. 1733, but did notcome up for a vote before the full Senate. On December 23, 2010, EPA announced that it had entered into settlements that require EPA to promulgate regulations addressing GHGemissions from electric generating units and refineries. See EPA, Fact Sheet, “Settlement Agreements to Address Greenhouse Gas Emissions from Electric Generating Units andRefineries,” www.epa.gov/airquality/pdfs/settlementfactsheets.pdf; see also EPA, Proposed Settlement Agreement, Clean Air Act Citizen Suit, 75 Fed. Reg. 82392 (Dec. 30, 2010).

9 For example, 268 investors from North America, Europe, Asia, Australia, Latin America and Africa, with collective assets totaling more than $15 trillion, released a statement inNovember 2010 that called for a robust new domestic policy framework, international agreement, and international finance tools related to climate change. The statement specificallynoted that government should adopt regulations requiring “corporate disclosure of material climate-related risks.” The statement was organized by the following groups—Ceres and theInvestor Network on Climate Risk (“INCR”), the Institutional Investors Group on Climate Change (“IIGCC”), the Investor Group on Climate Change Australia/New Zealand (“IGCC”), theUnited Nations Environment Programme Finance Initiative (“UNEP FI”), and the Principles for Responsible Investment (“PRI”)—and is available at www.ceres.org/Page.aspx?pid=1293.

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Determining MaterialityThe American securities laws are based upon the principle that sound investments,efficient markets, and a stable national economy depend upon public disclosure ofsignificant information on firms’ financial condition.10 In general, whether informationconcerning financial risks and opportunities is subject to disclosure obligations turns onwhether the information is determined to be “material.”11 The Supreme Court hasexplained that “[a] fact is material if there is a substantial likelihood that the disclosureof the omitted fact would have been viewed by a reasonable investor as havingsignificantly altered the ‘total mix’ of information made available,” and that determiningwhether information is material requires “delicate assessments of the inference thata ‘reasonable investor’ would draw from a given set of facts, and the significance ofthose inferences to him.”12 The Court has instructed that doubts about whetherinformation is material should be “resolved in favor of those the statute is designed toprotect,”13 and has emphasized that “[d]isclosure, and not paternalistic withholdingof accurate information, is the policy chosen and expressed by Congress.”14

The materiality standard is “inherently fact-specific,”15 and cannot be reduced toa simple formula. It necessarily depends upon a careful review of a firm’s particularcircumstances. For many companies, information concerning the financial risks andopportunities associated with climate change meets the standard of materiality, andtherefore requires disclosure; for other companies, such information may not bematerial. But well informed and careful attention to climate risks and opportunitiesis important for all companies.

Determining whether information is material is a critical responsibility for management,and one that cannot be responsibly performed without a careful review of all relevantinformation. The SEC has explained that, “[i]n identifying known material trends anduncertainties, companies should consider the substantial amount of financial and non-financial information available to them, and whether or not the available informationitself is required to be disclosed.”16 As the Financial Accounting Standards Board has putit, “materiality judgments can properly be made only by those who have all the facts.”17

In short, publicly traded companies should determine materiality by engaging in asystematic analysis of climate change’s impacts—both positive and negative—across theenterprise. The SEC Guidance addresses the issue of undertaking a systematic analysis.Together with Exchange Act Rules 13a-15 and 15d-15, the Guidance requires registrantsto have sufficient information on their “GHG emissions and other operational matters”

Publicly traded companiesshould determine materialityby engaging in a systematicanalysis of climate change’simpacts—both positiveand negative—acrossthe enterprise.

10 See, e.g., Basic Inc. v. Levinson, 485 U.S. 224, 230 (1988) (“Underlying the adoption of extensive disclosure requirements was a legislative philosophy: ‘There cannot be honestmarkets without honest publicity. Manipulation and dishonest practices of the market place thrive upon mystery and secrecy.’”) (quoting H.R. Rep. No. 73-1383, 2d Sess. 11 (1934));Santa Fe Industries, Inc. v. Green, 430 U.S. 462, 477-78 (1977); Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128, 151 (1972); SEC v. Capital Gains Research Bureau,Inc., 375 U.S. 180, 186-87 (1963).

11 See, e.g., SEC Staff Accounting Bulletin No. 99, 64 Fed. Reg. 45,150 (Aug. 12, 1999); SEC Guidance, 75 Fed. Reg. at 6292-93.12 TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 450 (1976).13 Id. at 448; see SEC Guidance, 75 Fed. Reg. at 6293 (quoting this language).14 Basic, Inc., 485 U.S. at 234.15 Id. at 236.16 See SEC, Interpretation: Commission Guidance Regarding Management’s Discussion and Analysis of Financial Condition and Results of Operations, Securities Act Release No. 8350,

Exchange Act Release No. 48,960, 68 Fed. Reg. 75,056, 75,061-62 (Dec. 29, 2003); see also SEC Guidance, 75 Fed. Reg. at 6295 n.62 (“As we have stated before, a company’sdisclosure controls and procedures should not be limited to disclosure specifically required, but should also ensure timely collection and evaluation of ‘information potentially subject to[required] disclosure,’ ‘information that is relevant to an assessment of the need to disclose developments and risks that pertain to the [company’s] businesses,’ and ‘information thatmust be evaluated in the context of the disclosure requirement of Exchange Act Rule 12b–20.’” (quoting Release No. 33–8124 (Aug. 28, 2002) [67 FR 57276])).

17 FASB, Statement of Financial Accounting Concepts No. 2: Qualitative Characteristics of Accounting Information 45 (1980), www.fasb.org/st/.

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to determine materiality, and to make certifications regarding “the maintenance andeffectiveness of disclosure controls and procedures” related to climate change.18 Inaddition, companies should find it beneficial to undertake this analysis not only toimprove their required disclosures, but to engage employees throughout the enterprisein creating strategies to reduce energy use and address opportunities, and to improveinvestor and stakeholder relations.

Which Companies Should Disclose Climate Risksand Opportunities?The SEC Guidance applies to all publicly traded companies required to file financialreports with the SEC. Therefore, corporations of all sizes in all industries need to assesstheir climate risks and opportunities and disclose any material issues in their filings.19

But this does not necessarily mean that every company will find material climate issuesto disclose. As discussed above, a company can only answer this question by undertakinga systematic materiality analysis. Whether, after having performed this careful review,a particular company must disclose information concerning climate risks and opportunities,and the nature and extent of such disclosure, will depend upon the particular facts andcircumstances of that company, and management's judgments concerning the materialityof the information assembled during the review. Here we discuss how both large andsmall companies may face material issues, as well as a range of sectors that have paidspecial attention to climate change issues.

Investors who petitioned the SEC for guidance have focused their corporateengagements on large companies—mainly high emitters and insurers—while also notingthat companies in virtually every industry face risks and opportunities related to climatechange and can find business opportunities and reduce their risks by developinga comprehensive climate change strategy. As part of their focus on high-emittingcompanies and insurers, investors and other organizations have created disclosureframeworks that supplement the SEC Guidance by providing useful reporting advicespecific to the following industries:

! Oil & Gas: Global Climate Disclosure Framework for Oil and Gas Companies, Ceres,Institutional Investors Group on Climate Change (IIGCC), Investor Group on ClimateChange Australia/New Zealand (IGCC) (March 2010)

! Autos: Global Climate Disclosure Framework for Auto Companies, Ceres, IIGCC andIGCC (September 2009)

! Electric Power: Global Climate Disclosure Framework for Electric Utility Companies,Ceres, IIGCC, IGCC (January 2008)

! Insurance: Insurer Climate Risk Disclosure Survey, National Association of InsuranceCommissioners (March 2010). Company responses to the survey are publiclyavailable on the California and Pennsylvania insurance department websites, and byrequest from the State of New Jersey.20

Companies in virtuallyevery industry… can findbusiness opportunities andreduce their risks bydeveloping a comprehensiveclimate change strategy.

18 SEC Guidance, 75 Fed. Reg. at 6295, n.62 (“In identifying, discussing and analyzing known material trends and uncertainties, registrants are expected to consider all relevantinformation even if that information is not required to be disclosed, and, as with any other disclosure judgments, they should consider whether they have sufficient disclosure controlsand procedures to process this information.”); id. at n.71 (“Management should ensure that it has sufficient information regarding the registrant’s greenhouse gas emissions and otheroperational matters to evaluate the likelihood of a material effect arising from the subject legislation or regulation.”); see also Jeffrey A. Smith et. al, “The SEC Interpretive Release onClimate Change Disclosure,” 43 Review of Securities & Commodities Regulation 95, 99 (2010) (“Most notably, the Release reaffirmed that disclosure control procedures—including,where appropriate, correct accounting for GHG emissions—will be necessary in order to substantiate disclosure of matters such as the potential effects of GHG emission regulations.”);Scott Deatherage, “The SEC Enters the Fray on Climate Risk Disclosure,” 25 Natural Resources & Environment 35, 38-39 (2011).

19 The SEC Guidance applies to both domestic and foreign corporations that file with the SEC. The Guidance discusses applicable provisions of Form 20-F and states that “most of thedisclosure requirements applicable to domestic issuers under Regulation S-K that are most likely to require disclosure related to climate change have parallels under Form 20-F,although some of the requirements are not as prescriptive as the provisions applicable to domestic issuers.”

20 www.insurance.ca.gov/0250-insurers/0300-insurers/0100-applications/financial-filing-notices-forms/annualnotices/climatlist.cfm;www.portal.state.pa.us/portal/server.pt/community/industry_activity/9276/climate_risk_survey/717493.

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Investors have also examined climate risks and opportunities in other major sectors andhave successfully encouraged some companies to improve their voluntary climatechange disclosure. For example, a number of large-cap companies in the consumerdiscretionary, consumer staples, financials, health care, industrials, informationtechnology, material and telecommunications sectors have developed or begun todevelop climate change strategies, and some produce good voluntary disclosure abouttheir risks and opportunities. Specifically, forty-four S&P 500 companies producedrelatively comprehensive voluntary disclosures in 2010, according to the CarbonDisclosure Project (“CDP”).21 CDP noted that the disclosure scores received by thesecompanies indicated one or more of the following:• Strong understanding and management of company-specific exposure to climate-

related risks and opportunities;• Strategic focus and commitment to understanding the business issues related to

climate change, emanating from the top of the organization;• Ability to measure and manage the company’s carbon footprint; and• Regular and relevant disclosure to key corporate stakeholders.

Companies in these sectors should make a practice of reviewing their voluntary climatedisclosures for material risks and opportunities that must be disclosed in their SECfilings. In its Guidance, the SEC emphasized that information reported voluntarily throughthe Global Reporting Initiative, CDP and the Climate Registry might also requiredisclosure in SEC filings:

These and other reporting mechanisms can provide important information toinvestors outside of disclosure documents filed with the Commission. Although muchof this reporting is provided voluntarily, registrants should be aware that some of theinformation they may be reporting pursuant to these mechanisms also may berequired to be disclosed in filings made with the Commission pursuant to existingdisclosure requirements.22

Finally, small companies tend to have much lower voluntary and mandatory climatechange reporting rates than larger companies. One study found that only 39 of 364Russell 2000 Index companies provided voluntary or SEC climate disclosure in 2009.23

Another study examining 10-K climate disclosure found significant differences basedon company size: “S&P 500 companies were most likely (as a percentage of companiesin the same market capitalization category) to provide disclosure (28.9%), followed byS&P MidCap companies (16.8%), and then S&P SmallCap companies (7.4%).”24

Smaller companies also tend to be more vulnerable to some climate risks, like physicalrisks, because of a limited ability to spread those risks across their enterprise. Thissuggests that smaller companies should look closely at improving their SEC disclosurerelated to climate change.

21 The Carbon Disclosure Project (“CDP”) is a non-profit organization that annually surveys over 3,000 organizations worldwide, on behalf of 500+ institutional investors, regarding howthey measure and disclose their greenhouse gas emissions and climate change strategies. See www.cdproject.net/en-US/Results/Pages/CDP-2010-disclosure-scores.aspx.

22 SEC Guidance, 75 Fed. Reg. at 6292.23 See Helen Mou, “Pax World Management & Clean Air-Cool Planet, Risk and Opportunity in a Low-carbon Business Climate: Small & Mid-Caps & Climate Change” (examining the

disclosure of climate-related risks and opportunities by companies representing the top 50 percent of market capitalization among the Russell 2000 Index),www.paxworld.com/newsmedia/2011/01/12/new-report-says-small-and-midcap-companies-vulnerable-on-climate-risk/.

24 Jane Whitt Sellers et. al, “Climate Change Disclosure: Creeping up the Learning Curve – Will Disclosure Catch up with Developments?” (McGuireWoods, 2009).

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Disclosure of Material ESG Issues in Additionto Climate ChangeCompanies preparing material risk disclosure for SEC filings should keep in mind thatclimate risk is one of numerous material environmental, social and governance (“ESG”)risks that tend to be poorly disclosed in securities filings. Companies should improvetheir disclosure of these material risks in order to comply with existing SEC regulations.Companies should also note that investors are increasingly examining a range of ESG issues,so improving disclosure provides other benefits, such as higher capabilities to addresssignificant risks and opportunities and improved relations with investors. The SEC’s Guidancecan serve as a useful model for disclosing material items for many other ESG issueswhich may pose regulatory, physical and indirect risks and opportunities to companies.

In a 2009 letter to SEC Chairman Mary Schapiro, a group of 41 investors representing$1.4 trillion in assets under management asked the commission to both: (1) Enforceexisting disclosure requirements for material environmental, social or governance riskssuch as climate change, which are underreported; and (2) Require disclosure of materialenvironmental, social, and governance risks, based on the Global Reporting Initiative asa framework for a mandatory ESG disclosure system. The investors wrote:

Many of us have worked to improve corporate reporting on environmental, social andgovernance (ESG) factors, because they pose material risks that affect investors butare generally not disclosed. Examples include environmental risks related to climatechange, water scarcity, toxic chemicals, and natural resource conservation; social riskfactors such as labor practices, working conditions, slave labor, and human rights;and governance issues such as board accountability and executive compensation.25

While investors are working on each of these issues, many have focused in the last yearon deepwater oil drilling, water scarcity and coal mining safety issues, partly driven byimportant developments in these areas.26 The April 2010 Deepwater Horizon oil wellblowout in the Gulf of Mexico highlighted the safety, environmental and financial risksof deepwater oil and gas drilling, which represents an increasingly large percentage ofoffshore oil and gas exploration and extraction. As of November 2, 2010, BP reportedcharges of $39.9 billion related to the blowout and spill.27 Investors concerned withinadequate risk management practices highlighted by the spill have written to over twodozen companies involved in offshore drilling, asking for information on their safety, riskmanagement, environmental management and disclosure practices.28

Climate risk is one ofnumerous materialenvironmental, social andgovernance (“ESG”) risksthat tend to be poorlydisclosed in securities filings.

25 INCR, Letter to SEC Chairman Mary Schapiro (June 12, 2009); see Ceres News Release, “Investors With $1.4 Trillion in Assets Call on the SEC to Improve Disclosure of ClimateChange and Other Risks,” www.ceres.org/Page.aspx?pid=1106; see also Social Investment Forum, “More than 50 Investor Groups, Social Investment Forum Urge SEC to RequireEnvironmental, Social & Governance (ESG) Disclosure” (July 21, 2009), www.socialinvest.org/news/releases/pressrelease.cfm?id=143.

26 Ceres & Pacific Institute, “Water Scarcity & Climate Change: Growing Risks for Business & Investors” (2009), www.ceres.org/Document.Doc?id=406; and see infra, page 15(discussing mining disclosure requirements of Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. 111-203, § 1503(a) (July 21, 2010)).

27 BP, News Release, “BP Returns to Profit in Third Quarter with Strong Operating Performance” (Nov. 2, 2010), www.bp.com/genericarticle.do?categoryId=2012968&contentId=7065828.28 In August 2010, a group of 58 global investors with assets under management totaling more than $2.5 trillion sent letters to CEOs at 27 oil and gas companies and 26 major insurers

seeking improved disclosure of risks related to deepwater oil and gas operations. See www.ceres.org/Page.aspx?pid=1266.

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Similarly, investor concerns about mining safety received increased attention after theexplosion at the Massey Upper Big Branch coal mine in April 2010. The Dodd-Frank WallStreet Reform and Consumer Protection Act, which became law in July 2010, requiressignificantly improved disclosure of mining-related safety risks. Section 1503 requirespublic companies that operate a “coal or other mine” to disclose in SEC filings a widerange of health and safety violations, including miner fatalities as well as the total dollarvalue of proposed violations assessments from the Mine Safety and HealthAdministration.29 Section 1503 also requires mine operators to file a “current report”on Form 8-K disclosing the receipt of certain notices or orders of mine safety violationsor a pattern of such violations.30 On December 15, 2010, the SEC released a proposedrule implementing this section, which calls for improved mining safety disclosure in quarterlyreports, annual filings, and shortly after material events occur, in Form 8-K filings.31

Water scarcity and water quality are also increasingly important to investors.32 Theseissues have arisen in the context of climate change disclosure,33 hydraulic fracturingpractices34 and municipal bonds. In October 2010, Ceres released a report which foundthat some of the nation’s largest public utilities may face moderate to severe watersupply shortfalls in the coming years, yet these risks are not reflected in the pricing ordisclosure of municipal bonds that public utilities rely on to finance their infrastructureprojects.35 The report recommends that in order to ensure material water disclosure bymunicipal utilities, securities regulators should provide guidance to issuers andunderwriters regarding disclosure of material water and climate risks.36 It also notes thatwhile the SEC Guidance mentions the importance of disclosing certain water risks as partof material climate change disclosure, similar disclosure regulations for municipal bondsdo not yet exist.

Thus, climate change is not the only ESG issue that may pose material risks andopportunities. But it is perhaps the paradigm of an environmental issue that maysignificantly impact a company’s financial condition yet is not being adequatelyaddressed by most corporations. Precisely because climate change cuts across theglobal economy and is interconnected with numerous environmental and socialconcerns, such as oil drilling, water scarcity and mining, it warrants special attentionfrom companies.

29 Pub. L. 111-203, § 1503(a) (July 21, 2010).30 Id. § 1503(b).31 See SEC, News Release, “SEC Proposes Specialized Disclosure of Mine Safety Information Under Dodd-Frank Act” (Dec. 15, 2010), www.sec.gov/news/press/2010/2010-246.htm;

SEC, Proposed Rule, Mine Safety Disclosure, 75 Fed. Reg. 80,374 (Dec. 22, 2010).32 See, e.g., Jeff Rodgers, World Resources Institute, “Water Risk Could Sink Investors” (Mar. 22, 2010), www.wri.org/stories/2010/03/water-risk-could-sink-investors; CDP, News Release,

“Carbon Disclosure Project reveals water constraints now a boardroom issue for global corporations” (Nov. 12, 2010), www.cdproject.net/en-US/WhatWeDo/Pages/news-event.aspx.33 Jeremy Osborn, “Corporate water disclosure: the devil is in the details,” The Guardian (Jan. 24, 2011), www.guardian.co.uk/sustainable-business/corporate-water-disclosure-response-

disappointing-details.34 Darryl Fears, “Energy firms queried on gas-extraction technique,” Washington Post (Jan. 22, 2011), www.washingtonpost.com/wp-

dyn/content/article/2011/01/21/AR2011012106946.html.35 Ceres, “The Ripple Effect: Water Risk in the Municipal Bond Market,” at 4-7 (Oct. 2010), www.ceres.org/Document.Doc?id=625.36 Id. at 9.

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SEC Disclosure Expectations and How Companies are RespondingDISCLOSING CLIMATE RISKS & OPPORTUNITIES IN SEC FILINGS: A GUIDE FOR CORPORATE EXECUTIVES, ATTORNEYS & DIRECTORS

SEC DISCLOSURE EXPECTATIONSAND HOW COMPANIES ARE RESPONDINGThe SEC’s new interpretive guidance on climate risk disclosure interprets existingregulatory requirements, primarily provisions of the Commission’s Regulation S-K, thatare the source of obligations to disclose material information related to climate changeand that have long been in force with regard to various environmental disclosurematters…37 The Guidance covers four types of climate risks and opportunities: impactsof domestic legislation and regulation, international accords, indirect consequences ofregulation or business trends, and physical impacts of climate change.

Methodology for Selecting Companiesand Rating DisclosuresFilings by companies in a variety of industries were assessed for possible inclusion in thisreport because of climate change’s impacts on a broad range of industries. We alsochose to emphasize large capitalization companies, which tend to face a larger array ofclimate risk and opportunity issues than smaller companies—although it is important topoint out that small companies also face material climate risks and opportunities.Electric power companies are emphasized in the report because at this early stage in theevolution of mandatory climate disclosure, utilities tend to report more information thanother companies.

This report’s aim was not to single out companies, and we recognize that disclosurepractice in this area is evolving rapidly, as are the underlying factors that influenceclimate risks and opportunities. For every company we found that had “poor” or “fair”disclosure—or no disclosure at all—dozens of similarly situated companies providedsimilar reporting. We found that “good” disclosure examples were rare, and we found noinstances of disclosure we believed should be rated “excellent.”

We found that “good”disclosure examples wererare, and we found noinstances of disclosurewe believed should berated “excellent.”

37 The Guidance relies principally upon Items 101, 103, 303 and 503(c) of Regulation S-K. See SEC Guidance, 75 Fed. Reg. at 6293-96. Item 101(c) requires, among other things,disclosure of the material effects of compliance with federal, state, and local environmental laws, 17 C.F.R. 229.101(c), and Item 103 requires disclosure of risks associated with non-routine legal proceedings involving the registrant, 17 C.F.R. 229.103. Item 303, concerning Management’s Discussion and Analysis, requires disclosure of “[a]ny such known trends oruncertainties that have had or that the registrant reasonably expects will have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations.”17 C.F.R. 229.303(a)(3)(ii). Item 503(c) requires disclosure of the most significant factors that make investment in the registrant speculative or risky. 17 C.F.R. 229.503(c).

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The rating of disclosures using the terms “poor,” “fair,” and “good” is a subjectiveassessment based on the authors’ evaluation of the SEC Guidance and our assessmentof reasonable investor expectations for high-quality disclosure. The elements of poor, fairand good disclosure vary depending on the topic—such as physical risks or regulatoryrisks—and are discussed in the body of the report.

Regulatory Risk and Opportunity: Impact of DomesticLegislation and RegulationThe Guidance explains that “significant developments in federal and state legislation andregulation regarding climate change” may trigger disclosure obligations underCommission rules and regulations, including Items 101, 103, 503(c) and 303 ofRegulation S-K.38 These can include, under Item 101, obligations to disclose materialestimated capital expenditures for control facilities, and risk factor disclosure regardingexisting or pending legislation or regulation. Under Item 303, a registrant must assesswhether enacted legislation or regulation is likely to have a material effect on theregistrant’s financial condition or results of operations. Pending legislation and regulationrelated to climate change can affect profits or losses from purchases or sales of tradableemissions credits; costs required to alter facilities in order to reduce GHG emissions; andprofits or losses arising from increased or decreased demand for goods and servicesresulting from regulation or legislation.

In the case of a known uncertainty, such as pending legislation or regulation, theGuidance explains that analysis of whether disclosure is required in Management’sDiscussion and Analysis (“MD&A”) “consists of two steps:” (1) whether the pendinglegislation or regulation is reasonably likely to be enacted, and (2) whether the measure,if enacted, is reasonably likely to have a material effect on the registrant, its financialcondition or results of operations. Unless management can determine that the answer toone of these inquiries is “no,” MD&A disclosure concerning the legislation or regulation“is required.”39 The Guidance cautions that management, in evaluating its disclosureobligations concerning proposed laws, should not restrict itself to negative consequences,but should consider whether the law may provide new business or cost-cutting opportunities.

Good regulatory risk and opportunity disclosure not only describes existing and proposedregulations and the company‘s positioning, but quantifies the impact to the maximumextent feasible, while assigning a monetary value or a range of possible values to thatimpact. Quantification maximizes the utility of disclosures for analysts and investors,who find it difficult to assess the financial impacts of purely qualitative disclosures.

The SEC Guidance provides examples of some of the specific items that can bedisclosed, each of which can be quantified or assigned a dollar value:• Costs to purchase, or profits from sales of, allowances or credits under a “cap and

trade” system;• Costs required to improve facilities and equipment to reduce emissions in order to

comply with regulatory limits or to mitigate the financial consequences of a “cap andtrade” regime; and

• Changes to profit or loss arising from increased or decreased demand for goods andservices produced by the registrant arising directly from legislation or regulation, andindirectly from changes in costs of goods sold.40

Good regulatory riskand opportunity disclosurenot only describes existingand proposed regulationsand the company’spositioning, but quantifiesthe impact to the maximumextent feasible.

38 SEC Guidance, 75 Fed. Reg. at 6295.39 Id. at 6296.40 Id.

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INVESTOR EXPECTATIONS FOR GOOD DISCLOSURE—REGULATORY RISKS AND OPPORTUNITIESFor investors, disclosure of regulatory risks and opportunities for companies in manysectors—not just high emitters—is a vital part of climate risk disclosure. Of course,disclosure by companies will vary significantly by sector in both quality and quantity,and companies in high-emitting sectors, like power companies, tend to disclose moreinformation than companies in other sectors. The following examples of regulatory riskdisclosure are focused solely on the quality of the information companies disclosed.

Poor disclosure of regulatory risks does not mention existing or proposed regulations,or mentions them without analyzing possible effects on the company. For example,Dean Foods Company, a food processor and distributor, stated in its 2009 10-K filing41

that its “business operations are subject to numerous environmental and other airpollution control laws,” and noted that “various laws and regulations addressing climatechange are being considered or implemented at the federal and state levels.” Thecompany discussed the potential impact of these laws only in the most general terms,stating that such laws “could require us to replace equipment, install additional pollutioncontrols, purchase various emission allowances or curtail operations,” the costs of which“could adversely affect our results of operations and financial condition.” Unhelpfullyvague or general references to regulatory risk of this type, often referred to as “boilerplate,”are common in the SEC filings of companies that mention climate change and are oflimited use to investors. While Dean Foods does not face the same level of regulatoryrisk as a company in a heavily regulated sector, Dean’s disclosures provide too littleinformation to provide a means of assessing its climate risk.42

Fair disclosure of regulatory risk discusses legislation and its possible effects on thecompany, but makes no attempt at quantifying or assigning a value to the risks, or failsto place such values in a meaningful context. Southern Company, an electric powercompany, disclosed general—as opposed to climate change-specific—environmentalcompliance costs with precision in its 2009 10-K filing.43 In contrast, the companydiscussed the possibility of “mandatory [climate change] requirements related togreenhouse gas emissions, renewable energy standards, and energy efficiency standards”but offered only general statements about the financial impacts of those developments:

The cost impact of [GHG emissions] legislation, regulation, new interpretations, orinternational negotiations would depend upon the specific requirements enacted andcannot be determined at this time. For example, the impact of currently proposedlegislation relating to greenhouse gas emissions would depend on a variety offactors, including the specific greenhouse gas emissions limits or renewable energyrequirements, the timing of implementation of these limits or requirements …andcost recovery through regulated rates or market-based rates for Southern Power.

Although the outcome cannot be determined at this time, legislation or regulation relatedto greenhouse gas emissions, renewable energy standards, air quality, coal combustionbyproducts and other matters, individually or together, are likely to result in significantand additional compliance costs, including significant capital expenditures, and couldresult in additional operating restrictions. These costs could affect future unit retirementand replacement decisions, and could result in the retirement of a significant number ofcoal-fired generating units of the traditional operating companies….

41 Dean Foods Company, Form-10-K (filed Feb. 25, 2010), www.sec.gov/Archives/edgar/data/931336/000119312510039767/d10k.htm.42 Dean Foods’ voluntary disclosure provided somewhat more detail, stating the company’s view that “[d]irect regulation or a cap appears unlikely in the United States in the near term”;

and that even adoption of a GHG regulatory scheme would not involve “disproportionate risk” because it would apply “across the industry and not create risk to one particularorganization.” Dean’s voluntary disclosure stated that because of the company’s large scale, it “may have a slight advantage if the industry becomes regulated, because of our ability todistribute production among many locations and implement scalable solutions for energy efficiency and transportation.” It added that “of our US operations only 5% of our facilitiesemit 25,000 tons of CO2e (the likely threshold) or more of direct emissions.” Dean Foods Company, Response to CDP 2010 Investor Information Request,www.cdproject.net/Sites/2010/92/4392/Investor CDP 2010/Pages/DisclosureView.aspx.

43 The Southern Company, Form 10-K (filed Feb. 25, 2010), www.sec.gov/Archives/edgar/data/3153/000009212210000009/g21794e10vk.htm.

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In the view of many investors, good disclosure on this topic discusses in detail thefinancial impacts of existing and proposed regulatory requirements on the company.For example, the electric power company AES Corp. disclosed in its 2009 10-K45 thefinancial impacts of the Regional Greenhouse Gas Initiative (RGGI), a currently operatingcap-and-trade regime in the Northeastern U.S., on the company in both 2010 and 2011:“Based on these assumptions, the Company estimates that the RGGI compliance costscould be approximately $17.5 million per year from 2010 through 2011, which is the lastyear of the first RGGI compliance period.” The company’s 10-K also provided informationabout the modeling and methodology used to arrive at this figure, as well as disclaimersthat the actual financial impact on the company may be different than this amount.

Companies should also disclose the potential material financial impacts of proposedlegislation and regulations that are “reasonably likely to be enacted”46 in SEC filings.Voluntary disclosure released in 2004 by the electric power company AEP provided agood model for this type of reporting. The company disclosed information about thepotential impacts on the company of two U.S. Senate bills to address climate changeemissions: “[M]anagement conducted quantitative analyses of the potential costs ofcurrently proposed emissions control regimes…. Compliance with the greenhouse gascontrol provisions of the McCain-Lieberman amendment appears possible with existingtechnologies at net present value costs between $0.5 and $0.9 billion, additional to thebase case. The Carper bill would require much higher additional costs, between $3.0and $6.4 billion.”47 Similar to AES’ 10-K disclosure, AEP disclosed additional informationabout models used, methodologies and disclaimers about the accuracy of the information.

Although discussions of the total potential financial impact of legislation are nearlyimpossible to find in recent SEC filings, reporting of regulatory risks by utilities hasimproved since the Guidance was issued. A recent study of 2009 10-Ks from 26 powercompanies found: “A number of issuers disclosed for the first time the specific facets of[climate change] legislation that would have material effects on their companies.Common topics among the filers who chose to discuss legislative details were factorsthat might affect financial performance, such as the availability of offsets, allowanceprices, technological development and secondary effects on fuel prices.”48

Regulatory Risk & Opportunity: International AccordsThe SEC Guidance notes that registrants should consider whether treaties orinternational accords relating to climate change have a material impact on theirbusiness, including the Kyoto Protocol, the EU Emissions Trading Scheme (“ETS”), andother international activities. Registrants whose businesses “are reasonably likely to beaffected” by treaties or international accords relating to climate change should monitorthe progress of potential agreements and consider the possible impact in satisfying theirdisclosure obligations based on the MD&A and materiality principles.49

45 The AES Corporation, Form 10-K (filed Feb. 25, 2010), www.sec.gov/Archives/edgar/data/874761/000119312510041006/d10k.htm.46 SEC Guidance, 75 Fed. Reg. at 6296.47 Donald M. Carlton et al., “An Assessment of AEP’s Actions to Mitigate the Economic Effects of Emissions Policies” (Aug. 31, 2004),

www.aep.com/environmental/reports/shareholderreport/docs/ReportOnly.pdf.48 Jeffrey A. Smith, “Early Effects Of SEC’s Climate Disclosure Release,” Law360 (Dec. 3, 2010) (discussing SEC disclosure regarding the American Clean Energy and Security Act

(Waxman-Markey)), www.cravath.com/files/Uploads/Documents/Publications/3255245_1.pdf.49 SEC Guidance, 75 Fed. Reg. at 6296.

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Companies disclosing information related to international accords can apply theguidance provided above for domestic regulations to the international context. Gooddisclosure of international accords, for example, discusses in detail the financial impactof regulatory requirements on the company, and attempts to quantify or monetizethe impacts, where possible. Total S.A., an integrated oil and gas company, providedfair disclosure in its 2009 20-F filing,50 because it discussed international accords andtheir possible effects on the company, but made no attempt at quantifying or assigninga value to the risks. In its 20-F, the company discussed EU efforts to reduce GHG emissionsunder the Kyoto Protocol: “In accordance with the 2009 revision of the aforementioneddirective, a quota auctioning mechanism is scheduled to be set up in 2013. When thissystem is established, Total’s industrial facilities may incur capital and operating costs tocomply with such legislation including the acquisition of emissions allowances.”

Investors must turn to unregulated voluntary disclosure, however, to find Total’s financialprojections about the future impacts of the EU ETS on the company. In its reporting toCDP, Total stated, “In Europe, according to preliminary estimates, our concerned exposedsectors may receive only 70 to 80% of their required allocations for the third period ofthe EU ETS, beyond 2012; this may represent an additional charge, according to marketprice, from 1 G! to 1.6 G! by taking into account a cost of 25! per tonne of CO2 for the2013-2020 period.”51 As previously discussed, the Guidance notes that materialelements of voluntary disclosure must also be included in SEC filings.

Indirect Consequences of Regulation or Business TrendsThe SEC Guidance states that “[l]egal, technological, political and scientificdevelopments regarding climate change may create new opportunities or risks forregistrants,” by, for example, decreasing demand for goods that produce significant GHGemissions; increasing demand for goods that result in lower emissions than competingproducts; increasing competition to develop innovative new products; increasing demandfor generation and transmission of energy from alternative energy sources; anddecreasing demand for services related to carbon-based energy sources, such as drillingservices.52 The SEC explains that such trends and risk factors may require disclosure asrisk factors, in MD&A, or as part of a registrant’s business description under Item 101.

Companies may also need to disclose climate-related reputational impacts as riskfactors. As the Guidance explains: “Depending on the nature of a registrant’s businessand its sensitivity to public opinion, a registrant may have to consider whether thepublic’s perception of any publicly available data relating to its GHG emissions couldexpose it to potential adverse consequences to its business operations or financialcondition resulting from reputational damage.”53

Good disclosure of business trends will require a thoughtful and candid discussionof management’s understanding of how climate change is affecting business trends.General statements about possible impacts of climate change are of limited value, butdetailed discussions of management’s views of climate change-related trends relevant tothe company’s financial position or prospects, or ways in which the economy’s reactionto climate change and GHG regulation may indirectly affect the company’s operations,are more useful to investors.

General statements aboutpossible impacts of climatechange are of limited value,but detailed discussions ofmanagement’s views… aremore useful to investors.

50 Total S.A., Form 20-F (filed Apr. 1, 2010), www.sec.gov/Archives/edgar/data/879764/000119312510074711/d20f.htm.51 Total S.A., Response to Investor CDP 2010 Information Request, www.cdproject.net/Sites/2010/57/19257/Investor%20CDP%202010/Pages/DisclosureView.aspx.52 See SEC Guidance, 75 Fed. Reg. at 6296.53 Id.

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INVESTOR EXPECTATIONS FOR GOOD DISCLOSURE—INDIRECT CONSEQUENCES OR BUSINESS TRENDSClimate change will indirectly affect both business trends in certain markets—e.g.,shifting consumer demand and creating new market opportunities—and individualcompanies’ bottom lines—e.g., by shifting weather and thus agricultural patterns andthereby increasing the price of agricultural inputs. The SEC Guidance cites a variety ofcategories of such indirect effects, including “[d]ecreased demand for goods thatproduce significant greenhouse gas emissions;” “[i]ncreased demand for goods thatresult in lower emissions than competing products;” “[i]ncreased competition to developinnovative new products;” “[i]ncreased demand for generation and transmission ofenergy from alternative energy sources;” and “[d]ecreased demand for services relatedto carbon based energy sources….”54

Poor disclosure of the indirect consequences of climate change might mention shiftingconsumer demand or regulatory developments potentially affecting competition ormarket share, but fails to provide sufficient detail to be useful to investors. Consequently,investors would have no clear indication of how climate risk will affect the operations andfinancial condition of the registrant. For example, coal mining corporation MasseyEnergy Company disclosed in its 2009 10-K filing55 that “[g]lobal climate changecontinues to attract considerable public and scientific attention.” The company addedthat “[e]nactment of laws and passage of regulations regarding greenhouse gasemissions by the United States or some of its states, or other actions to limit carbondioxide emissions, could result in electric generators switching from coal to other fuelsources,” “which could significantly affect demand for [Massey] products.” More contextand detail are necessary for this disclosure to help investors meaningfully assessMassey’s climate change-related risks and opportunities.

Fair disclosure provides more information concerning how the company’s financialcondition or operations may be indirectly affected by climate change, while still omittingkey information sought by investors, such as potential financial impacts. Chemicalcompany Air Products & Chemicals Co.’s 2009 10-K disclosure56 is terse andunspecific in identifying indirect climate change effects, noting only that “[a]ny legislationthat limits or taxes GHG emissions from Company facilities could impact the Company’sgrowth by increasing its operating costs or reducing demand for certain of its products.”The company also includes a slightly more detailed discussion of how market shifts dueto GHG regulation may present new business opportunities: “Regulation of GHG may alsoproduce new opportunities for the Company…. The Company is also developing a portfolioof technologies that capture carbon dioxide from power and chemical plants before itreaches the atmosphere, enable cleaner transportation fuels, and facilitate alternate fuelsource development. In addition, the potential demand for clean coal and the Company’scarbon capture solutions could increase demand for oxygen, one of the Company’s mainproducts, and the Company’s proprietary technology for delivering low-cost oxygen.”

Good disclosure of indirect climate change effects and climate-related business trendsincludes quantifications of impacts when feasible, and discussion of opportunitiescreated by regulation or changing business trends. Increased attention paid toenvironmental concerns, new climate-related regulations, and growing consumerdemand for climate-friendly products are giving rise to emerging markets for energyefficient and “green” products and services, and companies that understand thesetrends and properly assess their emissions and climate risk are better positioned to seizedeveloping business opportunities.

54 Id.55 Massey Energy Company, Form 10-K (filed Mar. 1, 2010), www.sec.gov/Archives/edgar/data/37748/000003774810000014/document.htm.56 Air Products and Chemicals, Inc., Form 10-K (filed Nov. 23, 2010), www.sec.gov/Archives/edgar/data/2969/000119312510266784/d10k.htm.

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An example of good disclosure of the indirect effects of climate change—disclosure thatexplains management’s strategy, includes quantified financial data, and gives context tothe details provided—is found in Siemens’ 2009 20-F filing.57 The electrical engineeringand electronics company explained that it considers climate change to be a “globalmegatrend[] that will have an impact on all humanity and leave [its] mark on globaldevelopments.” Siemens recognized that “[t]here is a strong need for innovativetechnologies to increase efficiency and reduce the emissions related to energygeneration and consumption.” The company reported that it has “aligned [its] strategyand business activities” to “reduce impacts on the environment and minimize carbondioxide emissions.” It disclosed that this strategy is focused on capitalizing on thegrowing market for “products and solutions with outstanding energy efficiency, such ascombined cycle power plants, energy-saving light bulbs and intelligent buildingtechnologies; systems and components for renewable forms of energy, such as windturbines and solar power; and environmental technologies for cleaner water and air.”

The company named this strategy its “Environmental Portfolio,” and it provided investorswith information about how products are selected for inclusion based on their emissionreduction profile. Importantly, Siemens disclosed estimated financial data about itsEnvironmental Portfolio, which allows investors to evaluate the company’s future financialoutlook. It also explained that it retains outside auditors to evaluate the profitability ofthe portfolio, about which Siemens reported:

In addition to its environmental benefits, our Environmental Portfolio enables us tocompete successfully in attractive markets and generate profitable growth. We hadset ourselves a revenue target for the Environmental Portfolio—to generate !25 billionin revenue from the portfolio by the end of fiscal 2011. We achieved that goalsignificantly earlier than planned. Including revenues from newly developed andadditionally qualified products and solutions, revenues from the portfolio in the currentyear amounted to !27.6 billion and exceeded the comparable revenues of !26.8 billionin fiscal 2009. This means that in fiscal 2010 our Environmental Portfolio alreadyaccounted for about 36% of our total revenues. As we continue to see growthopportunities for our Environmental Portfolio, we have set a new target within OneSiemens to exceed revenue of !40 billion from the portfolio by the end of fiscal 2014.

Disclosure of identified market trends, both negative and positive, how a company plansto adapt to or take advantage of such trends, and what this will mean for a company’smarket value are all important aspects of good disclosure of the indirect impacts ofclimate change.

Physical ImpactsSignificant physical effects of climate change, such as increased incidence of severeweather, rising sea levels, reduced arability of farmland, and reduced water availabilityand quality, have the potential to affect a registrant’s operations, competitiveness, andresults. The SEC Guidance notes that “severe weather can cause catastrophic harm tophysical plants and facilities and can disrupt manufacturing and distributionprocesses.”58 The Guidance also points out that severe weather is involved in mostproperty losses paid by insurance companies, and that a 2007 GovernmentAccountability Office study “cites a number of sources to support the view that severeweather scenarios will increase as a result of climate change brought on by anoverabundance of greenhouse gases.”59

57 Siemens Aktiengesellschaft, Form 20-F (filed Dec. 2, 2010), www.sec.gov/Archives/edgar/data/1135644/000095012310110234/f03502e20vf.htm.58 SEC Guidance, 75 Fed. Reg. at 6297.59 Id.

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INVESTOR EXPECTATIONS FOR GOOD DISCLOSURE—PHYSICAL IMPACTSClimate change is having concrete physical impacts on the operations and infrastructureof many companies. The SEC Guidance makes clear that, where material, such physicalclimate change-related impacts, as well as risks and opportunities, must be disclosed.

Poor disclosure of physical risks posed by climate change acknowledges that risks exist,but fails to specify their nature or magnitude. American National Insurance Company,which provides life, annuity, health, property, casualty and other types of insurance,recognized in its 2009 10-K60 that “increased claims activity resulting from catastrophicevents, whether natural or man-made, may result in significant losses,” and that“[c]limate change may also affect the affordability and availability of property andcasualty insurance and the pricing for such products.” No further details are provided,however, other than fluctuating aggregated catastrophic loss figures for several pastyears, which include non-climate change loss.

Fair disclosure of physical effects specifies the type of risk faced, but fails to provide anyquantification of that risk, explain which operational segments might be impacted, ordescribe how the company plans to respond. An example is the agribusiness companyCHS Inc.’s 2009 10-K disclosure,61 which acknowledged that climate change may affectthe “frequency and severity of storms, droughts, floods and other climatic events”resulting in regional agricultural output that “could …adversely affect the demand for ourcrop output products such as fertilizer and chemicals.” The company also noted that“[b]ecause our refineries are inland facilities, a possibility of increased hurricane activitydue to climate change, which may result in the temporary closure of coastal refineries,could result in increased revenues and margins to us due to the decrease in supply ofrefined products in the marketplace.”

Good disclosure of physical impacts provides detailed information about the nature ofclimate change risks and opportunities, and quantifies them where possible. AES’s 10-Kfor 200962 is helpful in that it enumerated different types of physical hazards thecompany could face from climate change and specific impacts on the company:

[A]ccording to the Intergovernmental Panel on Climate Change, physical risks fromclimate change could include, but are not limited to, increased runoff and earlierspring peak discharge in many glacier and snow fed rivers, warming of lakes andrivers, an increase in sea level, changes and variability in precipitation and in theintensity and frequency of extreme weather events. Physical impacts may have thepotential to significantly affect the Company’s business and operations. For example,extreme weather events could result in increased downtime and operation andmaintenance costs at the electric power generation facilities and support facilities ofthe Company’s subsidiaries. Variations in weather conditions, primarily temperatureand humidity also would be expected to affect the energy needs of customers.A decrease in energy consumption could decrease the revenues of the Company’ssubsidiaries. In addition, while revenues would be expected to increase if the energyconsumption of customers increased, such increase could prompt the need foradditional investment in generation capacity. Changes in the temperature of lakesand rivers and changes in precipitation that result in drought could adversely affectthe operations of the fossil-fuel fired electric power generation facilities of theCompany’s subsidiaries. Changes in temperature, precipitation and snow packconditions also could affect the amount and timing of hydroelectric generation.

60 American National Insurance Co., Form 10-K (filed Mar. 11, 2010), www.sec.gov/Archives/edgar/data/904163/000095012310023707/c97597e10vk.htm.61 CHS, Inc., Form 10-K (filed Nov. 12, 2010), www.sec.gov/Archives/edgar/data/823277/000095012310104712/c61063e10vk.htm.62 The AES Corporation, Form 10-K (filed Feb. 25, 2010), www.sec.gov/Archives/edgar/data/874761/000119312510041006/d10k.htm.

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With physical risk, as with other risks, concrete detail and financial detail are desirablebecause they allow investors to evaluate the risk a company faces with respect to itsoperations, and to draw comparisons among companies. Chiquita Brands InternationalInc., for example, provided good disclosure about its physical climate risks in its 200910-K filing.63 First, the company disclosed how physical climate change risks can affectgrowing conditions for foods it sells: “To the extent that climate changes lead to morefrequent or more severe adverse weather conditions or events, this could increase theimpact on our operations” because “[b]ananas, lettuce and other produce can beaffected by drought, temperature extremes, hurricanes, windstorms and floods; floods inparticular may affect bananas, which are typically grown in tropical lowland areas. Freshproduce is also vulnerable to crop disease and to pests, which may vary in severity andeffect, depending on …climatic conditions.”

Next, Chiquita discussed the range of specific effects of these conditions on thecompany, from lost harvests to reduced crops to increased costs, and other issues:“Unfavorable growing conditions caused by these factors can reduce both crop size andcrop quality. In extreme cases, entire harvests may be lost. These factors may result inlower sales volume and, in the case of farms we own or manage, increased costs dueto expenditures for additional agricultural techniques or agrichemicals, the repair ofinfrastructure, and the replanting of damaged or destroyed crops. Incremental costs alsomay be incurred if we need to find alternate short-term supplies of bananas, lettuce orother produce from other growers.”

Finally, Chiquita quantified some of the impacts it has faced. The company reported on“shipping interruptions, port damage and changes in shipping routes as a result ofweather-related disruptions,” and disclosed that “as a result of flooding which affectedsome of our owned farms in Costa Rica and Panama in December 2008, we incurredapproximately $33 million of higher costs, including logistics costs, related torehabilitating the farms and procuring replacement fruit from other sources.”

63 Chiquita Brands International, Inc., Form 10-K (filed Feb. 26, 2010), www.sec.gov/Archives/edgar/data/101063/000119312510043003/d10k.htm.

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Other Key Elements of Strong Corporate DisclosureDISCLOSING CLIMATE RISKS & OPPORTUNITIES IN SEC FILINGS: A GUIDE FOR CORPORATE EXECUTIVES, ATTORNEYS & DIRECTORS

OTHER KEY ELEMENTS OF STRONGCORPORATE DISCLOSUREWhile the SEC Guidance addresses regulatory, physical and indirect risks andopportunities in detail, in some circumstances companies must disclose additionalinformation in SEC filings, particularly related to climate change litigation. In addition,companies must disclose other material climate change information under long-established SEC disclosure regulations. One such category is climate-related legalproceedings involving the registrant or its affiliates, which must be disclosed under long-standing SEC rules governing disclosure of legal proceedings in general and environmentalproceedings in particular. Climate-related proceedings can be expected to becomea more significant factor as federal and state regulatory programs and enforcementefforts continues to develop.

For some companies, information about GHG emissions, their strategic approach toclimate change, or emissions management is material. As shown by the examples ofdisclosure below, some companies already report this information in their SEC filings.And three major power companies have agreed to disclose such information in SECfilings, where material, in an agreement with the New York State Attorney Generalsettling an inquiry over inadequate reporting.64

It is beyond the scope of this report to discuss when emissions, emissions managementinformation, and a strategic approach to climate change are likely to be material fora particular company, given that materiality is a fact-specific inquiry based upon areasonable investor standard. We therefore focus our discussion on investor statementsdescribing these issues and the importance of disclosing them in securities filings, andon examples of disclosure.

In the Global Framework for Climate Risk Disclosure, major institutional investorsworldwide strongly encouraged companies to report GHG emissions, their strategicanalysis of climate change, and emissions management information in securities filings.The investors who created the Framework include the nation’s two largest public pensionfunds and institutional investors in the U.S., Europe, Australia and New Zealand.65

For some companies,information about GHGemissions, their strategicapproach to climatechange, or emissionsmanagement is material.

64 See, e.g., New York State Office of the Attorney General, News Release, “Attorney General Cuomo, Joined By Vice President Gore, Announces Agreement With Major Energy Company,Dynegy Inc.: Second Major Agreement in Cuomo Initiative Requires Dynegy to Detail Financial Liabilities Related to Climate Change” (Oct. 23, 2008). In September 2007, New YorkState Attorney General Andrew Cuomo subpoenaed the executives of several major energy companies for information on whether disclosures to investors in filings with the SECadequately described the companies’ financial risks related to their emissions of global warming pollution. Cuomo issued subpoenas under New York State’s Martin Act, a 1921 statesecurities law that grants the Attorney General broad powers to access the financial records of businesses.

65 See Ceres, News Release, “Leading Investors Worldwide Release Global Framework for Climate Risk Disclosure” (Oct. 11, 2006) (announcing the California Public Employees’Retirement System (“CalPERS”), the California State Teachers’ Retirement System (“CalSTRS”), and the Connecticut Retirement Plans and Trust Funds call for companies to discloseGHG emissions and other climate change information in their securities filings).

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Key topics covered in the Global Framework are discussed in more detail below. Thesetopics—GHG emissions, a strategic analysis, and emissions management information—have influenced both mandatory and voluntary disclosure frameworks, and shouldcontinue to do so in the future. For example, newly issued guidance from Canadiansecurities regulators on environmental disclosure in securities filings addresses thestrategic analysis issue: “If an issuer has implemented environmental policies that arefundamental to its operations, item 5.1(4) of Form 51-102F2 requires the issuer todescribe these policies and the steps it has taken to implement them.”66 The new ASTMclimate change reporting standard addresses both emissions management informationand strategy, noting that disclosures that should be made by a reporting entity, ifmaterial, include “a discussion of the company’s current management position on andstrategic activities related to climate change.”67 Finally, the Climate Disclosure StandardsBoard’s new framework for climate reporting in financial filings, developed by NGOs,corporations, accounting bodies and representatives of the big four accounting firms,addresses each element of the Global Framework.68

In addition to the categories specifically addressed in the SEC Guidance, the followingcategories of information relating to climate risks and opportunities merit closeconsideration and, where appropriate, disclosure: climate change litigation, GHGemissions, and strategic analysis of climate risk and emissions management.

Climate Change LitigationClimate change-related judicial or agency proceedings involving a publicly tradedcompany, like other forms of litigation or administrative proceedings that may resultin significant liability or fines to a company, must be disclosed where material. Also,a proceeding must be disclosed, independently of the company’s determination ofmateriality, if the firm’s potential monetary exposure reaches specific thresholds set forthin SEC regulations addressing disclosure of environmental proceedings.

SEC regulations generally require disclosure of material legal proceedings involving thecompany, its subsidiaries, or its property.69 Item 103 of Regulation S-K establishes thegeneral rule that firms must “[d]escribe briefly any material pending legal proceedings,other than ordinary routine litigation incidental to the business.”70 It further specifies,however, that “notwithstanding” this general standard, firms must disclose agency orjudicial proceedings “arising under any Federal, State or local provisions that have beenenacted or adopted …primar[ily] for the purpose of protecting the environment” if(A) such proceedings are material to the registrant’s business or financial condition;(B) the proceeding involves a claim for damages that exceeds 10 percent of the firm’sassets, or (C) a governmental authority is a party to the proceeding (unless the firmreasonably believes any fine or damages would amount to less than $100,000).71

Legal proceedings involving climate change may trigger disclosure requirements—including proceedings in which the registrant is charged by governmental authorities orcitizen-plaintiffs with having violated regulatory emissions limitations, those involvingpermitting requirements for particular projects, or cases involving environmental analysisof climate change-related impacts.72 The above-quoted SEC regulations make clear thatcertain proceedings can by themselves require disclosure independent of management’sjudgments concerning materiality. Even when the potential monetary liability may be

66 Canadian Securities Administrators, Staff Notice 51-333, Environmental Reporting Guidance at 16 (Oct. 27, 2010).67 See ASTM standard E2718-10, Standard Guide for Financial Disclosure Attributed to Climate Change at 6.2.2.1.68 See CDSB, Climate Change Reporting Framework – Edition 1.0 at 19-26 (Sept. 2010) (“CCRF”), www.cdsb-global.org/.69 See SEC Guidance, 75 Fed. Reg. at 6293-94 (citing, inter alia, Instruction 5 to Item 103, 17 C.F.R. 229.103).70 17 C.F.R. 229.103.71 Id., Instruction 5.72 For a comprehensive current list of current climate change litigation in the U.S., including descriptions of cases, see Arnold and Porter LLP, www.climatecasechart.com.

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modest or nonexistent, a legal proceeding may still be material and subject to disclosure.For example, disclosure may be required if the proceeding could result in an injunctionbarring a project with material effects on the company’s operations or financial prospects,or if the proceeding could establish a precedent that would have a significant effect uponthe firm’s operations or financial condition.73

GHG EmissionsGHG emissions data—including both current emissions and trends over time—is oftencritical information both for a company’s own efforts to assess its climate change-relatedrisks and opportunities, and for investors determining a company’s financial conditionand prospects. Management and investors can use GHG emissions data to helpapproximate the financial impacts companies may face from future climate changeregulations. The SEC Guidance acknowledges existing disclosure of GHG emissions inSEC filings, and does not address the circumstances in which disclosure of emissionsunder the materiality standard is required.74 The Guidance does suggest that, evenwhere disclosure is not required, quantification of GHG emissions may be necessaryas a means of determining a company’s exposure to climate risk. The Guidance explainsthat “[i]n identifying, discussing and analyzing known material trends and uncertainties,registrants are expected to consider all relevant information even if that information isnot required to be disclosed.”75

Furthermore, investors worldwide have expressed a clear desire for standardizedemissions reporting by companies, through shareholder resolutions, the development ofa framework for disclosure in securities filings and voluntary questionnaires, among otherinitiatives.76 Several electric power companies, and a few companies in other industries,have for several years responded to this demand by including emissions data in SECfilings. A study by the law firm McGuire Woods of over 400 2008 10-K filings found that12 companies provided disclosure regarding the amount of their GHG emissions.77

Investors want not only a snapshot of current emissions, but a sense of the direction ofthe company’s future emissions and carbon management strategies. Specifically,investors have encouraged companies to disclose:

• Actual historical direct and indirect emissions since 1990;

• Current direct and indirect emissions; and

• Estimated future direct and indirect emissions of greenhouse gases from theiroperations, purchased electricity, and products/services.78

Investors have asked companies to report absolute emissions using the most widely agreedupon international accounting standard—the Corporate Accounting and Reporting Standard(revised edition) of the Greenhouse Gas Protocol, developed by the World Business Councilfor Sustainable Development and the World Resources Institute.79 If companies use adifferent accounting standard, they should specify the standard and the rationale for using it.

GHG emissions data—including both currentemissions and trendsover time—is often criticalinformation… for acompany’s own effortsto assess its climatechange-related risksand opportunities.

73 See Item 103, Instruction 5.A., 17 C.F.R. 229.103 (noting that disclosure is required, even if monetary thresholds are not reached, if “[s]uch proceeding is material to the business orfinancial condition of the registrant”).

74 See SEC Guidance, 75 Fed. Reg. at 6292, n.22.75 See id. at 6295 (emphasis added); see also id. at 6295 n.62 (“As we have stated before, a company’s disclosure controls and procedures should not be limited to disclosure

specifically required, but should also ensure timely collection and evaluation of “information potentially subject to [required] disclosure,” “information that is relevant to an assessmentof the need to disclose developments and risks that pertain to the [company’s] businesses,” and “information that must be evaluated in the context of the disclosure requirement ofExchange Act Rule 12b-20.”) (citing SEC, Release No. 33-8124 (67 Fed. Reg. 57276) (Aug. 28, 2002)).

76 Federal and state environmental laws require GHG emissions reporting by sources with emissions in excess of certain thresholds. For example, EPA’s Greenhouse Gas Monitoring Rulerequires covered sources to report their GHG emissions beginning January 1, 2010, with the first reports due on March 31, 2011. 40 C.F.R. Pt. 98. While some source and supplytypes have automatic compliance obligations, the EPA reporting rule is primarily focused on facilities emitting at least 25,000 metric tons of carbon dioxide equivalent per year.

77 Sellers, “Creeping,” supra note 24, at 3.78 “Global Framework for Climate Risk Disclosure,” supra note 4, at 5.79 Id. (citing World Business Council for Sustainable Development & World Resources Institute, “Corporate Accounting and Reporting Standard (revised edition) of the Greenhouse Gas

Protocol” (Mar. 2004), www.ghgprotocol.org/standards/corporate-standard).

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INVESTOR EXPECTATIONS FOR GOOD DISCLOSURE—GHG EMISSIONSCompanies’ GHG emissions profiles are critical factors in their climate risk strategies andincreasingly important to investors, and companies that calculate their GHG emissionsshould consider including emissions data in their SEC filings. Of course, for companiesthat determine their GHG emissions constitute a material risk, that data must beincluded in SEC filings.

Poor disclosure in this area contains GHG emissions data from the past year, butprovides no discussion of the meaning of those emissions figures, the methodology usedto arrive at them, or where they stand relative to past or expected future emissions.

Fair disclosure of emissions provides current and past emissions data, but fails tocalculate projected future emissions or place the company’s emissions profile within acontext meaningful to investors, such as a regulatory context. Energy companyConsolidated Edison (“Con Ed”) provided emissions data for the years 2005 to 2009 inits 2009 10-K80 filing and noted that “its greenhouse gas emissions constitute less than0.1 percent of the nation’s greenhouse gas emissions.” It noted that its “36 percentdecrease in greenhouse gas emissions during the past five years reflects equipment andrepair projects, including projects to reduce sulfur hexafluoride emissions, and increaseduse of natural gas at CECONY’s steam production facilities.”

A discussion was then made of current New York State carbon dioxide emissionsreduction requirements, as well as the possibility of federal GHG emissions caps. Con Edalso described the Regional Greenhouse Gas Initiative, but it provided only a generalindication of its specific impacts on the company:

Beginning in 2009, CECONY [Con Edison Company of New York] is subject to carbondioxide emissions regulations established by New York State under the RegionalGreenhouse Gas Initiative. The initiative, a cooperative effort by Northeastern andMid!Atlantic states, will first cap and then reduce carbon dioxide emissions resultingfrom the generation of electricity to a level ten percent below current emissions by2018. Under the initiative, affected electric generators are required to obtainemission allowances to cover their carbon dioxide emissions, available primarilythrough auctions administered by participating states or a secondary market. Theparticipating states initiated auctions in 2008 for portions of the 2009 and 2010allowances…. The cost to comply with legislation, regulations or initiatives limitingthe Companies’ greenhouse gas emissions could be substantial. (emphasis added)

These existing disclosures provide little information about the degree of risk this level ofemissions poses to the company, beyond stating that it could be substantial. Whendiscussing its emissions in the context of existing or proposed GHG regulations, it wouldbe more helpful for the company to report the potential financial impacts of thoseregulations. Furthermore, the disclosure of current and past emissions is useful, buta discussion of projected future emissions would be helpful for investors interested inassessing the company’s future prospects.

Good disclosure should include, at a minimum, past, present and projected futureGHG emissions data, as well as the methodology the company uses to analyzeemissions. For example, power company Xcel Energy reported in its 2009 10-K filing81

that it has “adopted a methodology for calculating CO2 emissions based on the recentlyissued reporting protocols of The Climate Registry.” It also provided quantified estimatesof its past, present and future GHG emissions: “Xcel Energy has estimated that itscurrent electric generating portfolio, which includes coal- and gas-fired plants, emittedapproximately 60.1 million tons of CO2 in 2009. Xcel Energy has also estimated

80 Consolidated Edison, Inc., Form 10-K (filed Feb. 22, 2010), www.sec.gov/Archives/edgar/data/23632/000119312510036116/d10k.htm.81 Xcel Energy, Inc., Form 10-K (filed Feb. 26, 2010), www.sec.gov/Archives/edgar/data/72903/000104746910001536/a2196778z10-k.htm.

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emissions associated with electricity purchased for resale to Xcel Energy customers fromgeneration facilities owned by third parties. Xcel Energy estimates that these third-partyfacilities emitted approximately 20.7 million tons of CO2 in 2009. Estimated total CO2

emissions, associated with service to Xcel Energy electricity customers, declined by5.9 million tons in 2009 compared to 2008, with a combined cumulative reductionof over 39.0 million tons of CO2 since 2003.”

The company went on to provide more context about its future emissions growth andreduction plans: “Xcel Energy anticipates that its ownership share of Comanche Unit 3,a new coal-fired generation project scheduled for completion in early 2010, will result inCO2 emissions of approximately 3.4 million tons of CO2 per year…. Operation ofComanche Unit 3 will help support Xcel Energy’s efforts to develop renewable energy,retire older, less-efficient resources and take other steps to reduce emissions across itssystem consistent with state regulatory processes. Xcel Energy plans to implement cleanresource development and conservation plans that will result in overall reductions in XcelEnergy’s CO2 emissions, both in absolute terms and per Kwh of electricity produced.”

Mining company Rio Tinto also provided good disclosure of its GHG emissions, in its2009 20-F filing,82 including contextual information and explaining its emissionscalculation method. Specifically, it recognized that “climate change …[is] one of the [RioTinto’s] greatest challenges and opportunities,” and “[r]educing the greenhouse gas(GHG) emissions intensity of [its] production is a key performance indicator.” The companythen provided specific GHG emissions data for each year since 2005, noting a 7.5%drop in emissions from 2008 to 2009 due to the divestment of an aluminum smeltingplant in China, and stating a total GHG emission reduction goal of 10% by 2015.

Importantly, Rio Tinto also gave investors information on how it calculates its emissions,which it “defined as the sum of on site emissions and those from the net purchase ofelectricity and steam minus net carbon credits voluntarily purchased from, or sold to,recognised sources, were 41.0 million tonnes of carbon dioxide equivalent, nearly ninemillion tonnes lower than in 2008. This is the result of asset divestments and reducedlevels of production at some operations.”

Similarly, the company’s disclosure of emissions by business segment provides contextto the data and helps investors properly evaluate the company. Rio Tinto specified thatits “energy efficient aluminium smelting technology …represents 71 percent of theGroup’s energy use, [but] only produces 64 percent of …total GHG emission[s]….”It also recognized that transportation and processing add significantly to total emissions,and “[i]n 2009, the three most significant sources of indirect emissions associated with[Rio Tinto’s] products were: Approximately 4.5 million tonnes of CO2-e associated withthird party transport of our products and raw materials[; a]n estimated 120 milliontonnes of CO2-e associated with customers using our coal in electricity generation and"steel production[; and] approximately 330 million tonnes of CO2-e associated withcustomers using our iron ore to produce steel.”

Finally, Rio Tinto also disclosed some of its approaches to emissions reduction, including“investing in developing and commercialising carbon capture and storage (CCS)technology,” and “work[ing] to develop efficient downstream processes….”

82 Rio Tinto, Form 20-F (filed May 27, 2010), www.sec.gov/Archives/edgar/data/863064/000095012310053740/u08506e20vf.htm.

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Strategic Analysis of Climate Risk andEmissions ManagementIn the Global Framework for Climate Risk Disclosure, investors ask companies to provideanalysis that identifies companies’ future challenges and opportunities associated withclimate change, including management’s strategic analysis of climate risk along with a clearand straightforward statement about implications for competitiveness. Where relevant, thefollowing issues should also be addressed: access to resources, the timeframe that appliesto the risk, and the firm’s plan for meeting any strategic challenges posed by climate risk.

Specifically, in the Global Framework, investors urge companies to disclose a strategicanalysis that includes:

• Climate Change Statement—A statement of the company’s current position onclimate change, its responsibility to address climate change, and its engagementwith governments and advocacy organizations to affect climate change policy.

• Emissions Management—Explanation of all significant actions the company istaking to minimize its climate risk and to identify opportunities. Specifically, thisshould include the actions the company is taking to reduce, offset, or limitgreenhouse gas emissions. Actions could include establishment of emissionsreduction targets, participation in emissions trading schemes, investment in cleanenergy technologies, and development and design of new products. Descriptions ofgreenhouse gas reduction activities and mitigation projects should include estimatedemission reductions and timelines.

• Corporate Governance of Climate Change—A description of the company’scorporate governance actions, including whether the Board has been engaged onclimate change and the executives in charge of addressing climate risk. In addition,companies should disclose whether executive compensation is tied to meetingcorporate climate objectives, and if so, a description of how they are linked.83

The SEC Guidance points out that companies’ disclosure obligations are not limited topotential risks and costs of climate change but also extend to disclosure of opportunities.In the context of emissions management reporting, discussion of regulatory issuesshould address not only costs of compliance, but also any material businessopportunities that climate change regulations present for companies—whether increaseddemand for emerging “green” technologies or products, comparative advantagespresented by a firm’s carbon-efficiency, or public demand for new services associatedwith changing weather patterns.

Recent SEC filings provide illustrations of the many kinds of opportunities that maywarrant disclosure. Duke Energy Corporation, an electric power company, includedin its 2009 10-K84 a discussion of its pursuit of innovative approaches to manage itsemissions: “[I]n addition to relying on new technologies to reduce its CO2 emissions” tocomply with state-level renewable energy mandates, the firm “is also making a significantcommitment to increased customer energy efficiency and promoting enhanced use ofrenewable energy for meeting customers’ electricity needs. Duke Energy’s actions aredesigned to build a sustainable business that allows our customers and our shareholdersto prosper in what is expected to be a carbon-constrained environment.”

Investors ask companiesto provide analysis thatidentifies companies’future challenges andopportunities associatedwith climate change.

83 “Global Framework on Climate Risk Disclosure,” supra note 4, at 6.84 Duke Energy, Form 10-K (filed Feb. 26, 2010), www.sec.gov/Archives/edgar/data/1326160/000119312510043083/d10k.htm.

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The 10-K continued: “In addition to relying on new technologies to reduce its CO2

emissions, Duke Energy has filed for regulatory approval in most of the states in whichit operates for its energy efficiency programs, which will help meet customer electricityneeds by increasing energy efficiency, thereby reducing demand instead of relying almostexclusively on new power plants to generate electricity. Duke Energy has receivedregulatory approval from Ohio, North Carolina and South Carolina and is in the processof rolling programs out in these states. Duke Energy received regulatory approval fromIndiana and has withdrawn its filing in Kentucky.”

However, Duke’s 10-K disclosure could be improved by quantifying or indicating theexpected financial impacts of its energy efficiency efforts. Only by reviewing thecompany’s voluntary disclosure could investors learn that “Duke Energy is investing upto $1 billion over 5 years in smart grid technologies to fully realize our customer energyefficiency vision.”85 If significant investments like those by Duke rise to the level ofmaterial information, companies must disclose them in SEC filings, in addition to anyvoluntary disclosure they undertake.

As with disclosure of risks, specificity and financial data are more valuable than generalities.In its 2009 10-K,86 chemical company DuPont explained that it is “expanding its offeringsaddressing… environment, energy and climate challenges in the global marketplace bydeveloping and commercializing renewable, bio-based materials; advanced biofuels;energy-efficient technologies; …and alternative energy products and technologies. Thegoals are tied directly to business growth, including increasing food production, increasingrenewable sources for energy and raw materials, and providing greater safety andprotection for life, assets, and the environment.” While this provides investors specificinformation about a seemingly wide range of initiatives related to climate change, thelack of quantitative information does not allow investors to assess the company’s effortsagainst DuPont’s own benchmarks or other firms’ efforts.

Disclosure of corporate governance actions related to climate change should includea description of the board’s and senior executives’ actions and a description of whetherexecutive compensation is tied to meeting climate change objectives. National Grid, anelectricity and natural gas transmission company, provided helpful information on someof these topics in its 2009 20-F filing.87 For example, it identified the board committeecharged with addressing issues involving climate change:

The Risk & Responsibility Committee… is responsible for reviewing the strategies,policies, targets and performance of the Company within its Framework forResponsible Business…. The Committee reviews the Company’s non-financial risksfor which it has oversight and in this regard the Committee interfaces with and worksclosely with the Audit Committee. Accordingly it reviews matters such as: safety,including public and process safety; the environment and climate change….

National Grid also discussed senior executives involved in climate change management,and specific actions the board took during the year to examine climate risk and otherESG issues such as health and safety.

Disclosure of corporategovernance actions…should include adescription of the board’sand senior executives’actions and a descriptionof whether executivecompensation is tiedto meeting climatechange objectives.

85 Duke Energy Corporation, Response to Investor CDP 2010 Information Request, www.cdproject.net/Sites/2010/52/5052/Investor%20CDP%202010/Pages/DisclosureView.aspx.86 E.I. du Pont de Nemours & Co., Form 10-K (filed Feb. 17, 2010), www.sec.gov/Archives/edgar/data/30554/000104746910000954/a2196441z10-k.htm.87 National Grid PLC, Form 20-F (filed May 25, 2010), www.sec.gov/Archives/edgar/data/1004315/000095012310052651/y84347exv15w1.htm#217.

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ConclusionDISCLOSING CLIMATE RISKS & OPPORTUNITIES IN SEC FILINGS: A GUIDE FOR CORPORATE EXECUTIVES, ATTORNEYS & DIRECTORS

CONCLUSIONIn the last decade, the need for companies to examine and disclose the implicationsof climate change and greenhouse gas regulation for their operations and financialcondition has moved to the forefront of investor concern. As elaborated above, investorsneed to know how companies are responding to climate change and related regulatorydevelopments, which can carry a range of significant financial risks and opportunities.The release of the SEC Guidance on climate disclosure marks an important recognitionof that reality, and underlines that disclosure is a matter not only of sound corporatestrategy and good investor relations, but, in many cases, a legal obligation.

Like the physical and regulatory changes related to climate change, its financialimplications remain complex and rapidly-evolving. Although public companies’ climatereporting has improved somewhat in recent years, it remains true that disclosures veryoften fail to satisfy investors’ legitimate expectations. Insuring adequate disclosure willrequire commitment from management, as well as continued attention from regulators—and it will require that investors continue to make their needs heard. Greater attentionto risks and opportunities will help companies themselves, and improved disclosure willhelp investors and the broader public.

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11-Point ChecklistDISCLOSING CLIMATE RISKS & OPPORTUNITIES IN SEC FILINGS: A GUIDE FOR CORPORATE EXECUTIVES, ATTORNEYS & DIRECTORS

11-POINT CHECKLIST: DEVELOPING A CLIMATECHANGE STRATEGY & DISCLOSING RISKS &OPPORTUNITIES IN SEC FILINGSThe SEC Guidance constitutes a major step forward towards improving and beginningto standardize climate risk disclosure. It underlines that disclosure of material climaterelated risks and opportunities is required under current U.S. securities laws. TheGuidance provides important and needed advice on how corporations should assessmateriality and provide timely reporting to investors.

The Guidance, appropriately, does not provide advice about how companies canapproach climate change as a strategic business issue. Here we provide some practicaladvice for companies: an 11-point approach to (1) identify and comprehensively addressclimate risks and opportunities throughout the enterprise and (2) satisfy their SECdisclosure obligations. For more detailed guidance on developing systems to address anddisclose sustainability and climate change issues, companies should examine reportssuch as the 21st Century Corporation: The Ceres Roadmap to Sustainability.88

I. Creating Governance Structures and Systems toComprehensively Address Climate Issues1. Integrate consideration of climate risk and opportunity throughout the firm.

Climate change should be an important part of a company's overall sustainabilitystrategy. Managers and employees specially charged with evaluating and addressingclimate risk and dealing with climate change issues should consult regularly with allrelevant components of the firm, usually including the legal, financial, environmental,risk management, operations and investor relations business units. Similarly,personnel responsible for preparing sustainability strategy and voluntary climatedisclosures should be in close communication with those responsible for assessingfinancial risk and preparing and approving mandatory securities disclosures.

88 “21st Century Corporation: The Ceres Roadmap to Sustainability” (“Ceres Roadmap”) provides more information on building systems related to climate change and other ESG issues,including information about governance for sustainability and stakeholder engagement, www.ceres.org/ceresroadmap.

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2. Create a climate management team. For most firms, climate change presents ahost of novel and rapidly developing issues. Responding effectively to thesechallenges requires having a team in place that has the expertise and specificmission to recognize and address how climate change presents business risks andalso provides opportunities. Having dedicated teams at the senior management levelis critical for ensuring that climate change is taken seriously at the top and integratedthroughout the company’s operations. Finally, to ensure management accountability,key performance indicators should be a component of the evaluation of seniorexecutive performance and compensation packages.89

3. Create a board oversight committee. Proper board oversight is important becauseclimate change issues, in addition to being managerial and operational matters,affect corporate strategy, reputation and capital investments, which are importantconcerns for boards.90 Companies should designate a committee of the board toassume specific responsibility for climate change oversight within their charters.Companies should establish a dedicated climate committee or expand the role of anexisting committee to include climate issues.91

4. Develop internal controls and procedures for gathering GHG emissions dataand other climate change-related information. Systems, processes and controlsto gather reliable information on firm emissions, physical risks, enacted and proposedregulations, and climate-related initiatives will determine the quality of managementanalysis, decision-making and disclosure to investors. For many companies, thesesystems are essential, because the process of gathering emissions data posescomplex questions related to setting organizational and operations boundaries,tracking emissions over time, managing inventory quality and other issues.

II. Recording Emissions and Calculating Emissions Trends5. Measure, benchmark, and inventory current GHG emissions from operations,

electricity use, and products. As stated in the Global Framework on Climate RiskDisclosure, calculating emissions is an “important first step in addressing climaterisk.”92 Whether or not greenhouse gas emissions are material and subject tomandatory disclosure under the securities laws will depend upon the magnitudeof a company’s emissions weighed against the content of existing or proposedregulations. But a firm cannot identify the potential impact of regulations withoutknowing what its emissions are. As the SEC Guidance explains, management “shouldensure that it has sufficient information regarding the registrant’s greenhouse gasemissions and other operational matters to evaluate the likelihood of a material effectarising” from enacted or proposed legislation or regulations.93

6. Calculate projected and past emissions. The Global Framework notes thatanalysis of past emissions, where feasible, and projected, future GHG emissions isnecessary for a firm to understand its emissions trends and assess future regulatoryor competitiveness risks. Such information helps to put disclosures concerningcurrent emissions in context for investors.

89 See, e.g., id. at 19.90 See, e.g., Calvert Asset Management Company & The Corporate Library, “Board Oversight of Environmental and Social Issues: An Analysis of Current North American Practice,” at 8

(Sept. 2010). The study found that “while a substantial number of large-cap North American firms have adopted some form of board oversight for sustainability, many companies—even those which espouse a commitment to environmental and social matters in public statements or reports—have yet to embrace the practice. In addition, even where it has begun,board responsibility for corporate responsibility often does not extend to true strategic planning and risk management.” Id.; see also Chartered Accountants of Canada, “ClimateChange Briefing: Question for Directors to Ask” (2009).

91 See “Ceres Roadmap,” supra note 88, at 17 (recommending that “[b]oard committee charters should spell out specific sustainability-related responsibilities and accountabilitystructures, including the responsibility to oversee the content and effectiveness of policies, to review the company’s sustainability targets, strategy and performance, and to review theadequacy of the company’s transparency on that performance”).

92 “Global Framework,” supra note 4, at 5.93 SEC Guidance, 75 Fed. Reg. at 6296 n.71; see also id. at 6295 n.62.

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7. Create specific emissions reduction targets and regularly report on progress.For many companies, setting goals for reducing greenhouse gas emissions isinvaluable for focusing the firm’s energies on achieving greater energy efficiency.Setting goals also sends an important signal to investors and other stakeholders thata firm is committed to addressing climate change. Goal setting is especially valuableto investors when specific GHG emissions reduction targets and deadlines are set,and when reliable and transparent mechanisms are put in place, such as verificationby third party auditors, that allow the firm and its investors to track progress towardachieving such goals.

III. Identifying and Analyzing Risks and OpportunitiesArising From Climate Change8. Identify risks and opportunities; then assess materiality. The heart of effective

disclosure in SEC filings is management’s systematic analysis of potential risks andopportunities relating to climate change, and its exercise of judgment on which risksand opportunities are material and therefore require disclosure. Doing thiseffectively—and providing investors the information they seek—requires expandedforms of collaboration between the investor relations, legal, corporate socialresponsibility and environmental, health and safety teams. The materiality of risksor opportunities ultimately depends upon a careful, contextual examination of theparticular risk or opportunity and its significance for the registrant.

Consideration of climate risks and opportunities requires a broad review of thenumerous ways in which climate factors may materially affect the companyoperations and financial prospects—including energy use, supply chain,transportation and logistics, markets for products and services.

Climate-related risks and opportunities can be classified in several broad categories:

• Physical risks. Identifying physical risks requires an understanding of the variedways in which climate change can affect the environment and a company’soperations—from the effect of increased temperatures on air conditioning orequipment cooling, to increased risk of strong storms, to effects on water availabilityor quality. Companies should assess physical climate risks by examining how changesin climate affect the business and its operations, including its supply chain.

• Financing and underwriting risks and opportunities. Climate change imposes anincreased risk of harm to companies that finance, insure, reinsure, or indemnifyagainst losses to properties or operations. For example, coastal properties orindustrial facilities may face new or increased risks from intensified storms, but alsonew opportunities in the form of increased demand for insurance products.

• Regulatory risks and opportunities. Firms should identify existing regulations thataffect their financial position and operations, as well as proposed measures thatare reasonably likely to be enacted. Because regulations that affect a company’soperations may be adopted at all levels of government, assessing regulatory riskrequires a thorough and ongoing review of the legal landscape. Companies shouldbe aware of developments at the international, national, state and municipal levels,as well as the regional entities that are working to reduce emissions.

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Once the relevant regulatory measures are identified, companies need to inquirehow they would affect the company’s financial condition and results ofoperations—e.g., are regulatory compliance costs likely to increase or decreasewith time? As noted, the SEC Guidance contains specific advice on how companiesshould decide what to disclose regarding proposed regulations when theirenactment into law is uncertain.

For some companies, enacted or proposed statutes or regulations may provideimportant opportunities—e.g., a state’s enactment of a renewable portfoliostandard may provide a competitive advantage to a company that sells electricitygenerated from renewable resources; a new energy efficiency tax credit mayprovide opportunities for firms offering weatherization services or products.

• Litigation risks. Litigation relating to climate change that may materially affecta company’s financial position must be disclosed under certain SEC regulations,like any other form of litigation. The SEC’s regulations (Item 103 of Regulation S-K)contain specific quantitative benchmarks for determining whether particularlitigation must be disclosed, but management should independently assess themateriality of pending court or administrative proceedings.

• Indirect risks and opportunities. Even when a company is not directly subject togreenhouse gas regulations or affected by physical risks, climate change can affecta company’s financial position in many ways, such as increasing the costs ofenergy or by changing patterns of consumer demand. As the SEC Guidanceexplains, risks and opportunities may arise from a wide variety of developments thatcan affect demand for goods and services or increase competition. Managementshould consider whether, in light of known trends associated with climate change,climate change is likely to cause the company to gain or lose market share, andwhether it is situated to enter emerging climate change-related markets. Materialrisks and opportunities related to this should be disclosed.

• Reputational risks. Public perceptions about climate change can be an importantfactor in stakeholders’ opinions of companies, and demand for particular products.Companies should review the effect of their operations and policy positionsconcerning climate change on public perception of their business as a whole andon the perception of their products and services. Companies should also considerthe public perception of their industrial sector in general and how that perceptionmay affect their reputation as a company or create an implicit requirement to act.Where such effects may be material, they should be disclosed, along withmanagement’s analysis of how it plans to address these reputational issues.

• Emissions. Companies’ GHG emissions profiles are critical factors in their climaterisk strategies, and companies that calculate their GHG emissions should includeemissions data in their SEC filings. Disclosure of quantitative GHG emissions isespecially important to investors because it provides concrete and specificinformation that allows for valid comparisons among firms. Data focused on whollyowned or equity share operations, and including geographic breakdowns, is alsouseful to investors.94

94 See CCRF, supra note 68, at 22-26. The Framework’s “approach to organizational boundary setting aligns to boundaries used for financial reporting purposes so that GHG emissionsare reported for the same entities as those for which financial statements are produced.” See id. at 23-24 for more information. Regarding a geographical breakdown of emissions, theCCRF recommends, “Where it is likely to aid understanding, GHG emissions results should be broken down by … [t]he main countries or regions in which the organization operates….”Id. at 26.

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IV. Disclosing Climate Risks and Opportunitiesin SEC Filings9. Quantify emissions, risks and opportunities whenever possible. Quantitative

information concerning climate risk is helpful to investors and allows for comparisonsamong firms. Whenever specific numbers are reasonably attainable, they arepreferred over general statements. For forward-looking disclosure for operations inregions where a carbon price is in place or anticipated, carbon price assumptionsshould be stated.

10. Be specific: Provide a particularized discussion of climate risks andopportunities with respect to specific company assets and operations. Therisks that climate change may pose for companies—whether financial or physical,direct or indirect—are dependent upon a firm’s particular line of business and thegeographic location of its facilities; these risks cannot be adequately analyzed anddisclosed in an abstract or generic manner. Climate change may affect a singlecompany in different ways: For example, many energy firms have investments in bothfossil fuel-based generation facilities with high greenhouse case emissions andtechnologies such as wind and solar generation facilities with no or relatively lowgreenhouse gas emissions. Such firms may face risks as well as opportunities froma regulatory regime disfavoring high-emissions operations or from consumer attitudesfavoring renewable energy. Investors interested in how firms will fare in a transitioningto a carbon-constrained world will want particularized disclosure of both risks andopportunities, so companies should avoid generic “boilerplate” disclosure. Investorswill also want to hear management’s explanation of its strategic approach withspecific reference to its discrete operations.

11. Consider investors’ demands when assessing materiality. The materialitystandard that determines what information public companies must disclose ultimatelyturns on the needs of the reasonable investor. With climate risk disclosure, as withother matters, investors’ perspective should inform management’s judgments aboutwhich information to disclose. This requires an understanding of the evolvingdisclosure landscape, including recent, broadly supported statements of investors’needs,95 shareholder resolutions, and recent corporate-investor dialogues. It is alsoimportant for management to be mindful of voluntary climate change disclosurestandards,96 frameworks developed by standard setting bodies97 and standards setby foreign securities regulators.98 Materiality judgments ultimately depend upon theparticular facts and circumstances, but investors’ strongly and repeatedly stateddemands for thorough disclosure of information on climate risks and opportunitiesdemonstrate that climate risk is now a major concern of the “reasonable investor”who is the measure of disclosure obligations under the securities laws.

95 Leading statements of investors’ needs include the Global Framework for Climate Risk Disclosure and the CDSB’s Climate Change Reporting Framework.96 For example, companies should review the Global Reporting Initiative’s Sustainability Reporting Framework as well as the Carbon Disclosure Project’s annual questionnaire. In the

electric power, oil and gas and transportation sectors, firms should review disclosure frameworks developed jointly by IIGCC, Ceres and IGCC Australia/New Zealand. In the insurancesector, firms should review the National Association of Insurance Commissioners’ Insurer Climate Risk Disclosure Survey.

97 See ASTM standard E2718 – 10, Standard Guide for Financial Disclosures Attributed to Climate Change.98 See Canadian Securities Administrators, Staff Notice 51-333, supra note 66 (covering climate change and additional environmental issues).

FOR MORE INFORMATION,CONTACT:Jim CoburnSenior Manager, Investor ProgramsCeres, Inc.99 Chauncy St., 6th FloorBoston, MA [email protected] ext. 119www.ceres.orgwww.incr.com

ABOUT THE AUTHORSJim Coburn, who served as project director, is an attorney and Senior Manager, InvestorPrograms at Ceres. He directs Ceres’ efforts to improve mandatory reporting of the risksand opportunities related to climate change and other environmental issues. He is agraduate of Cornell University and Boston College Law School.

Sean H. Donahue led the research team for this project. He is a partner and co-founderof Donahue & Goldberg LLP, a small civil appellate law firm, where his practice oftenfocuses on federal environmental and natural resources law. Sean is a 1989 graduate ofColumbia University, a 1992 graduate of the University of Chicago School of Law, andsubsequently was a law clerk to then-judge Ruth Bader Ginsburg and to Justice JohnPaul Stevens. Before starting his own practice, he was an associate at Jenner & Blockand an attorney in the Environment and Natural Resources Division of the U.S.Department of Justice. He has taught environmental law, natural resources law, climatechange policy, and other subjects at University of Iowa College of Law, Washington & LeeUniversity School of Law, and Georgetown University Law Center.

Suriya Jayanti is an attorney focused on energy and environmental matters. Shegraduated from Claremont McKenna College and American University’s WashingtonCollege of Law, and clerked for Chief Judge Eric T. Washington of the District of ColumbiaCourt of Appeals.

ABOUT CERESCeres is a national coalition of investors, environmental groups, and other public interestorganizations working with companies to address sustainability challenges such asclimate change. Ceres directs the Investor Network on Climate Risk, a group of 95institutional investors with assets exceeding $9 trillion, by identifying the financialopportunities and risks in climate change and by tackling the policy and governanceissues that impede investor progress toward more sustainable capital markets. For moreinformation, please visit www.ceres.org and www.incr.com.